Fixed and Variable Tax Deferred Annuities - By: Mike Anderson

With tax deferred annuity you can save for retirement through pre tax contributions. The premiums or contributions are deducted from your salary; hence you can enjoy a cut on your taxable income. The fund accumulated and interests added to the fund are not taxable until the fund is withdrawn. You can enjoy a tax benefit and save for your retirement age together.

Tax deferred annuity is lifetime annuity or long term investment scheme. Under this plan the assets keep increasing with time; when you retire you can get a steady income. Tax implications arise only when the fund is withdrawn at the time of retirement. If you withdraw the fund before attaining the age of 59 years and 6 months you are likely to face IRS income tax penalties and general income taxes.

There are two types of tax deferred annuities; fixed tax deferred annuities and variable tax deferred annuities. Let’s learn more about them.

Fixed tax deferred annuity offers a guaranteed or fixed rate of interest for a certain span of time. Earnings go high without imposing any tax responsibilities until the money is withdrawn by the annuitant that is the owner of the lifetime annuity. It is always recommended to purchase fixed tax deferred annuities from a company that has sufficient stability and that is likely to stay in the market for a long period.

Under variable tax deferred annuities plans the capital is subject to market; the fund will increase according to the ups and downs in the market. At the time of withdrawal the fund can be significantly higher or lower than the capital invested. These plans are flexible.

You may ask why someone would go for variable tax deferred annuity then! People who are interested in tax benefits on savings and want high rate of interest as well usually go for variable annuities. Life insurance companies usually issue such annuity programmes.

You have to save money for retirement; saving money in bank will fetch income tax. Tax deferred annuities sound really good. Initially it gives you huge tax benefits. The fund is taxable only when you withdraw it; the benefit that you get through out your life is much higher than what you pay. Lifetime annuity is something worth taking interest in.

However, you may experience pre withdrawal penalty if you withdraw it earlier. Let’s know more about early withdrawal.

Consequences of Early Withdrawal from Tax Deferred Annuity

There is no restriction at all; you can withdraw from tax deferred annuity or simplified employee pension any time. However, it is always recommended to continue with tax deferred annuity until you attain the right age which is 50 years 6 months.

There are some consequences of early withdrawal. The prime consequence is 10% penalty. If your age is below 59 years 6 months early withdrawal may bring in huge tax implications. Early withdrawal from tax deferred annuity and simplified employee pension you have to face IRS penalty of 10%. This penalty is usually added to the general income tax rate that you have to pay commonly.

About the Author

Mike Anderson is a business consultant who has good information on tax deferred annuity and lifetime annuity. For more information visit http://www.totalreturnannuities.com/

Article Directory Source: http://www.articlerich.com/profile/--Mike-Anderson/93079

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