Annuities are a component of financial planning, but they are an insurance product. It can be especially beneficial to work with someone who is licensed to sell annuities and give financial advice when planning for retirement. They bring a new level of product education to the table. For example, the tax benefits of annuities.
Fixed rate annuities and fixed indexed annuities are a great way for seniors to receive a very generous return. They also provide safety and security. No matter what downturn the market might take, you have the assurance that your principal invested into the annuity is always protected. There are also very substantial tax benefits of annuities in addition to principal protection.
Annuities Reduce Taxes
An annuity can help avoid or reduce taxes on social security income. Since 1983, Social Security income has been subject to taxation above certain thresholds. Many retirees are unaware of this fact. Up to 50% or up to 85% of your Social Security income can be subject to taxation depending on your income. Research has shown that taxation of social security depletes your assets on average 5 to 7 years sooner.
Annuities are one of the few investment vehicles that allow you to position your money so that it doesn’t count toward your taxable income where social security is concerned. Provisional income is income that counts towards determining if your Social Security is taxable. Investment vehicles that do not count toward your provisional income are Roth IRAs, tax-deferred annuities and cash value within life insurance policies. Many investors think that tax free municipal bonds are free from inclusion in the Social Security tax calculation, but this is not the case.
Annuities Provide Compounding Interest
Another power tax benefit of annuities is the triple compounding effect of tax deferred annuities. These 3 tax deferred benefits are:
- earn interest on the principal
- earn interest on the interest
- and earn interest on the tax savings
Albert Einstein once said that compounding interest is the eighth wonder of the world. With tax deferred annuities you get triple compounding. Because of this tax deferred benefit, you would have to receive a significantly higher return from a taxable investment to equal a tax deferred investment. The chart below illustrates this great benefit.
We will be sharing more information on annuities on our blog. Access our blog here.
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Investment advisory services offered through Virtue Capital Management, LLC (VCM), an investment adviser registered with the U.S. Securities and Exchange Commission. VCM and BW Wealth Management are independent of each other. Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek
tax or legal advice from an independent professional.