What is a Deferred Annuity
Jason Stolz CLTC, CRPC
What is a Deferred Annuity? A Deferred Annuity allows you to grow money tax-deferred over time before converting it into guaranteed income later. Unlike immediate annuities that begin paying right away, a deferred annuity provides a flexible accumulation phase, offering investors the opportunity to earn interest while deferring taxes until withdrawals or income begin. This structure makes deferred annuities a cornerstone for retirement income planning.
At Diversified Insurance Brokers, our advisors compare rates from more than 100 A-rated carriers to design customized income strategies—helping clients find the right balance between growth potential, liquidity, and guaranteed lifetime income.
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How a Deferred Annuity Works
When you purchase a deferred annuity, you begin in the accumulation phase—your investment earns interest or market-linked credits without paying taxes each year. When you decide to start income, the contract transitions to the payout phase, providing predictable income for a set period or life. You can customize this structure based on your goals, whether that’s steady growth, lifetime income, or legacy protection.
Types of Deferred Annuities
- Fixed Deferred Annuity: Offers a guaranteed interest rate and principal protection—ideal for conservative investors.
- Fixed Indexed Annuity: Earns interest based on market index performance (like the S&P 500) without downside risk.
- Variable Deferred Annuity: Invests in subaccounts similar to mutual funds, with growth potential and risk exposure.
- Deferred Income Annuity (DIA): Defers payments for a set number of years to generate higher future income.
Advantages of a Deferred Annuity
- Tax-Deferred Growth: Earnings compound without annual taxation until withdrawn.
- Flexible Timing: You control when income begins.
- Principal Protection: Fixed and indexed options protect against market losses.
- Guaranteed Income Options: Convert accumulated value into predictable lifetime income.
- Legacy Planning: Optional death benefits can pass value to heirs.
Potential Drawbacks
- Liquidity Limits: Withdrawals before age 59½ may incur penalties and surrender charges.
- Fees: Certain riders or features may carry costs, though typically lower than variable products.
- Complexity: Terms and crediting methods vary by carrier—understanding each option is key.
Who Should Consider a Deferred Annuity?
- Pre-retirees looking to grow savings securely before taking income.
- Investors seeking guaranteed lifetime income in the future.
- Anyone wanting to defer taxes on interest and growth.
- Clients who want to supplement or delay Social Security benefits.
A deferred annuity works best as part of a comprehensive retirement plan—especially for those who want income certainty and market protection.
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FAQs: Deferred Annuities
When does income begin with a deferred annuity?
Income starts at a future date you select—typically several years after purchase. The longer you defer, the higher the guaranteed payout.
Are earnings in a deferred annuity taxable?
No taxes are due until you withdraw funds or start income. This allows your money to compound tax-deferred over time.
Can I access my money early?
Yes, but early withdrawals may trigger surrender charges or IRS penalties before age 59½. Many contracts allow 10% annual penalty-free withdrawals.
What’s the difference between a deferred and immediate annuity?
An immediate annuity starts paying right away, while a deferred annuity accumulates value first and pays later, often yielding higher long-term income.
Can a deferred annuity include income riders?
Yes. Income riders can guarantee lifetime withdrawals and enhance growth potential with roll-up rates, creating predictable future income streams.
