Save more money for retirement
With a tax-deferred savings or investment strategy, the money that might otherwise go to pay current taxes remains invested for greater long-term growth potential. As a result, any interest, dividends and capital gains you earn can benefit from the power of tax-deferred compounding. How much of a difference could that make over the long run? Take a look.
The power of tax deferral
Hypothetical example
The power of tax deferral illustration above is hypothetical and is intended solely to demonstrate the comparative effect of compounding on tax-deferred vs. taxable investments. It does not reflect the actual return of any product or its investment options, nor does it reflect any withdrawal charges, insurance charges, contract administration charges or portfolio operating expenses associated with a tax-deferred or taxable investment. Such expenses would lower overall returns. The assumed rate of return is not guaranteed. Withdrawals of taxable amounts from tax-deferred investments are subject to ordinary income tax, and if taken prior to age 59½, an additional 10% federal tax may also apply in the case of annuities. Withdrawals are also subject to state tax. Lower maximum capital gains rates may apply to certain investments in a taxable account (subject to IRS limitations, capital losses may also be deducted against capital gains), which would reduce the difference between the performance in the accounts shown in the chart. You should consider your personal investment horizon and current and anticipated income tax brackets when making investment decisions as they may further impact the results of the comparison. Please consult with an independent tax advisor or attorney for more complete information concerning your particular circumstances and the tax statements made in this material.
Consider the Rule of 72
To get a better idea of the power of tax deferral and tax-deferred compounding, consider the Rule of 72, a mathematical relationship that approximates the time it may take for an investment to double.1 Simply divide 72 by the rate of return. Here’s an example:
| Tax-deferred investment | Taxable investment | ||
|---|---|---|---|
| Rate of return: | 7% | Rate of return: | 7% |
| Current tax rate: | 0% | Current tax rate: | 22% |
| Rate of return: | 7% | Rate of return after taxes: | 5.46% |
| Rule of 72: | 72 ÷ 7 | Rule of 72: | 72 ÷ 5.46 |
| Potentially doubles in 10.29 years | Potentially doubles in 13.19 years | ||
Help reduce current taxes
Saving or investing on a tax-deferred basis through an annuity can offer you many of the tax advantages afforded to retirement plans and accounts. Plus, you’ll have greater flexibility as to how much you can contribute and when you’re required to take distributions, unless the annuity is held within a retirement plan or account such as an IRA, 401(k) or 403(b).2
With an annuity, you don’t pay taxes on your interest or earnings until withdrawn, which is typically at retirement when you may be in a lower tax bracket. When you do take withdrawals from an annuity, withdrawals of taxable amounts are subject to ordinary income tax and if taken prior to age 59½, an additional 10% federal tax may apply. Unlike other types of investments, annuities offer an important advantage:
Take action for your financial future
As you prepare for your financial future, it may make sense to periodically review your retirement savings and investment strategies from a tax perspective.
Action is everything. Talk to your financial and tax professionals about tax-smart strategies for retirement today.
1 The Rule of 72 does not guarantee investment results or function as a predictor of how an investment will perform. It is simply an approximation of the impact a targeted rate of return would have. Investments are subject to fluctuating returns and there can never be a guarantee that any investment would double in value. The Rule of 72 is shown for illustrative purposes and does not represent the past or future performance of any specific product or investment. Distributions from the tax-deferred account will be taxable when withdrawn.
2 Keep in mind, the purchase of an annuity within a retirement plan or account does not provide additional tax-deferred treatment of earnings. However, annuities do provide other features and benefits that may be important to you, including options for guaranteed lifetime income and a guaranteed death benefit for your beneficiary.
3 Note: some annuities pay dividends instead of interest; however, just as with interest, such dividends retained in an annuity are not subject to current taxation.