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
Two column chart that compares a hypothetical $100,000 investment earning 7% interest in a fully taxable investment over 20 years with no withdrawals to a hypothetical $100,000 investment earning 7% interest in a tax-deferred investment over 20 years with no withdrawals. Both investments assume a 22% tax bracket. Column 1: Investment with tax deferral grows to $386,968 after 20 years. If taxes are then paid on this investment in the 20th year, that would equate to $323,835. This assumes interest/earnings of $286,968 are taxed at 22% at the end of the 20th year. Column 2: Investment without tax deferral grows to $289,571.
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.
Please seek the advice of an independent tax professional or attorney for more complete information concerning your particular circumstances and any tax statements made in this material.
Guarantees are backed by the claims paying ability of the issuing insurance company.
Annuities are long-term insurance products designed for retirement. An investment in a variable annuity involves investment risk, including possible loss of principal. A variable annuity contract, when redeemed, may be worth more or less than the total amount invested. Early withdrawals may be subject to withdrawal charges. Partial withdrawals reduce the contract value and may also reduce certain benefits under the contract, such as the death benefit and the amount available upon a full surrender. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply.
There are different types of annuities with varying benefits, features, and risks, including potential loss of principal. Speak with your financial professional for more information.
Retirement plans and accounts, such as an IRA, 401(k) or 403(b), etc., can be tax-deferred regardless of whether or not they are funded with an annuity. 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.
Variable annuities are sold by prospectus only. The prospectuses for each underlying fund as well as the variable annuity contract describe the investment objectives, risks, fees, charges, expenses, and other information for each, respectively. The statutory and summary prospectuses for each underlying fund and the variable annuity contract should be considered carefully before investing. Please contact your insurance and securities licensed financial professional or call 800-445-7862 to obtain any of those prospectuses, which should be read carefully before investing.