How Is the Interest on a Tax-Deferred Annuity Taxed?

The tax benefits of a tax-deferred annuity help the interest rate increase plan's value faster. This type of annuity is chosen as an option to fund a person's retirement.

Annuity Categories

Annuities are financial contracts that distribute a specific amount of money over a period of time according to the terms of the agreement. They are categorized as qualified or nonqualified.

Taxes Deferred

Annuities are tax-deferred, which means the funds will grow tax-free until they are withdrawn.

Interest

The interest earned from a tax-deferred annuity accumulates without taxation until a person makes a withdrawal. The interest rate is guaranteed for a fixed annuity, but it can increase if the plan is a variable annuity.

Considerations

Interest rates for annuities are determined by the financial company, while private annuities, which are set up between two parties that are not a company, are subject to IRS rate regulation.

Warning

Withdrawals from tax-deferred annuities are taxed at regular income tax rates. But if an owner under the age of 60 takes money from a qualified annuity that is part of a retirement plan, such as an IRA, an additional 10 percent federal tax penalty is levied against the distribution.

References

• Vanguard: Annuities
• Allstate: Variable Annuities
• MetLife: Annuities

Resources

• Insurance Information Institute: What Are the Different Types of Annuities?
• Investopedia: Private Annuities