October 28, 2009

Annuity holders have many options to choose from when it comes to investing in an annuity. Each type, whether it’s a fixed, variable or indexed annuity, contains its own advantages and disadvantages and caters to a specific group. But a recently published article on InsuranceAgents.com suggests holders looking to build their wealth in an easy and tax-free way should invest in a tax deferred annuity.

“[T]ax deferred annuities allow annuitants to receive a guaranteed income for life,” the article, Tax Deferred Annuity: Leading the Path to Success, describes. “You won’t benefit from this feature with alternatives such as stocks, bonds, mutual funds or CDs. A tax deferred annuity, whether it’s fixed, variable or indexed, can prove to be very beneficial to an investor if used under the right circumstances.”

On top of providing investors with the ability to let their investment accumulate free of taxation, a tax deferred annuity also helps them reach their financial goals faster. Of the three tax-deferred annuity options, each brings its own benefits to the table: fixed annuities are known for guaranteeing an investor’s rate of return while a variable annuity does not have a fixed rate of return and is subject to change throughout the accumulation period, but allows the holder to seek a higher rate of return. An indexed tax deferred annuity, on the otherhand, is the best of both worlds—the interest rate varies according to the market performance of the index.

There are some drawbacks, however. “Each tax deferred annuity contains some tax consequences,” the article emphasizes. “Contact your life insurance agent or financial advisor to find out if these consequences would affect you should you invest in one.”

Since everybody’s financial circumstances are different, a tax deferred annuity might not be the best investment for some. Those thinking about taking the plunge should contact their life insurance agent or financial advisor before making a final decision.

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Staff contribution: Rafael Onak