Because most people, no matter what their age, need to accumulate funds for the future, whether to supplement a pension or Social Security benefits or to simply build another financial cushion for retirement, a deferred annuity can be a suitable investment choice.
A deferred annuity is designed to accumulate funds for the long term. Accordingly, it is characterized by an accumulation stage. Generally speaking, the accumulation period associated with a deferred annuity is typically eight to ten years or more. Contract owners could be assessed a penalty if they withdraw funds from their annuities earlier.
Advantages of using deferred annuities for accumulating funds for retirement is that all premiums deposited into the contract accumulate on a tax-deferred basis. Earnings are taxed only when withdrawn, which enhances an annuity’s ability to generate growth over the long term. The power of tax deferral gives deferred annuities an important advantage over other products that are currently subject to income tax.
At the end of the accumulation stage, the owner can withdraw the funds in whole or in part, leave the funds in the contract to continue accumulating, or annuitize the contract. Any interest or growth the contract earns is not taxed as long as those funds remain in the contract.