Annuities tax deferral obviously, as its name implies, will allow you to defer your taxes.
In addition, it will also give you an opportunity to invest your money which, when it grows, will not be taxed.
This is therefore a good way of building up your wealth.
With an annuity you will need to make payments on a periodic basis and the money invested will then accumulate over a period of time.
When a date arrives when the accumulated wealth is to be distributed to the holder of the annuity, the holder benefit as the wealth that they have accumulated is not going to be taxed.
In most cases, taxes will become due when the wealth is distributed to the annuity holder but with annuities tax deferral the holder enjoys a number of benefits.
There are different kinds of annuities that each has a different kind of tax deferral situation.
If you are holding a fixed annuity (which is a very popular option) then you will earn a predetermined rate of investment on your contributions to the fixed annuity.
This kind of annuity will last for a specific period of time during which time the holder must make their contributions which will grow and also not attract taxes.
When the annuity matures, the time to distribute the earnings arrives and the payments to the holder will also begin.
The distribution can be made in the form of annuity payments which are different to the lump-sum payment.
In the former case, the holder enjoys tax advantages because the payments are being spread over a period of time and so the taxes are also spread over a period of time and not concentrated in one year.
This is also when the taxation starts.
The holder of the fixed annuity will be taxed on the gains that they have earned on their investments.
However, annuities tax deferral means that the annuity becomes an insurance related product and so gains will be taxed on the regular income and not on the capital gains.
In the case of variable annuities, the returns on the investment that are earned by the annuity holder during the period of accumulation are not fixed.
Rather, the gains are tied to certain investments that the holder has selected and which attracts variable returns which in turn are determined by the way that the market performs.
Such annuities were created to help the holder earn better returns but also mean that the holder has to be willing to accept higher risks.
When the gains are distributed the holder will be taxed on their normal income and not on the capital gains.
One should also learn about annuities tax deferral as it applies to indexed annuities.
Index annuities and their investments performances are linked to the ways that certain financial market performances are indexed.
Standard & Poors is a typical example of the financial market performance index.
The taxation consequences of such form of annuity are very like the case of variable annuities.
The bottom line is that there are more advantages to annuities tax deferral than simple deferral of tax.
It also means that the annuitant gets to receive an income stream that is guaranteed for their life.
Such advantages are not available for those who invest in CDs, mutual funds, bonds and stocks.