Tax-Smart Annuities: Enhancing Your Retirement Strategy
January 23, 2025
Many people question whether annuities can be part of their retirement strategy. Annuities, after all, seem quite appealing because they come with numerous tax advantages. The fewer taxes you pay, the more you can ultimately maximize every dollar of your hard-earned retirement income.
We encourage you to regard annuities as a fundamental component of retirement planning. The annuities you buy into can offer stability and tax-efficient growth, which can get you closer to achieving the retirement goals you’ve established.
Understanding Annuities and Their Tax Benefits
Let’s begin by discussing three different types of annuities: fixed, variable, and indexed. The annuity most suitable for you will depend on various factors, such as your financial goals and risk tolerance.
While fixed annuities tend to generate lower returns, they come with less risk than variable annuities, which tie the success of your annuity directly to the stock market. A variable annuity may get you higher returns, but there’s far less security for your principal investment.
With regard to indexed annuities — sometimes referred to as fixed-indexed annuities or equity-indexed — these types of annuities pay interest based on a market index’s performance rate. You’ll benefit if the markets it follows (such as the S&P 500) perform well. It is important to be aware of the rate cap and participation rate guarantees that accompany the fixed-indexed annuities. These components can affect your overall return.
All three annuities we’ve mentioned above offer tax-deferred growth, meaning you don’t have to pay taxes on the earnings until you begin to make withdrawals. This is a substantial advantage because, over time, it allows you to accumulate more wealth.
How Annuities Enhance Retirement Income
Annuities can provide a guaranteed income stream throughout your retirement. That income stream can give you the financial security you need as you fulfill your retirement goals, whether that involves meeting your basic living expenses, traveling, relocating, or making one or more big purchases.
An experienced financial advisor can help you minimize taxes on retirement income by implementing strategies, such as timing annuity payouts. Delaying payouts permits the annuity to continue to grow. By the time you’re ready to start receiving the payouts, you may be in a lower tax bracket.
Taxable Investments Vs. Tax-Deferred Annuities
Taxable accounts require you to pay taxes on interest, dividends, and capital gains the year they are earned. Alternatively, tax-deferred annuities allow your investment to grow without being taxed until you begin withdrawing the funds. The earnings from the annuity will be taxed as ordinary income, but you might appreciate postponing paying taxes, especially if you enter a lower tax bracket.
When comparing the potential long-term growth between taxable investments and annuities, you should consider how taxable investments can reduce compound growth over time. Because taxable investments are subject to annual taxation, you risk not being able to accumulate as much wealth as you would with an annuity.
Choosing the Right Annuity for Your Retirement Plan
Our team at 1891 Financial Life encourages you to think about your risk tolerance. Do you want to try to maximize your retirement savings in a way that doesn’t offer a high level of protection against a volatile stock market? Or would you prefer to have a safety net — an annuity that can earn money and provide you with a guaranteed income stream regardless of stock market fluctuations?
We can help you determine your risk tolerance, understand your financial needs, and choose the annuity that would serve you well.
Final Thoughts
Many clients find it worthwhile to include annuities in their comprehensive retirement strategy. Schedule a consultation with an 1891 Financial Life retirement planning expert to explore annuity options, ask questions, and navigate the retirement landscape with utmost confidence. Contact us today for personalized assistance and to explore your options.
About 1891 Financial Life
Our culture is about looking out — for you, for others, for family, for the community. That is how we go “Beyond Life Insurance.”
At 1891 Financial Life, we don’t just sell policies; we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. In 2023, 1891 Financial Life was listed by Forbes as one of "The World's Best Life Insurance Companies."
Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs no matter what stage of life you’re in.