Deferred Annuity
What Is a Deferred Annuity?
A deferred annuity is an annuity contract in which payments begin at a future date rather than immediately after the investment is made. During the deferral period, the invested funds may grow through interest or investment returns.
Deferred annuities are commonly used as long-term retirement savings vehicles.
Why It Matters
Deferred annuities allow individuals to accumulate savings over time while postponing income payments until retirement. This provides an opportunity for funds to grow before withdrawals begin.
Tax-deferred growth can also make deferred annuities attractive for long-term planning.
How Deferred Annuities Work
Deferred annuities generally have two phases:
- the accumulation phase, when funds grow through interest or investment returns
- the payout phase, when income payments begin
Policyholders may contribute a lump sum or periodic payments during the accumulation period.
Example
A person purchases a deferred annuity at age 45 and begins receiving income payments at age 65.
Deferred Annuity vs Immediate Annuity
- Deferred annuities delay payments until a later date.
- Immediate annuities begin payments soon after purchase.
FAQs About Deferred Annuities
Can funds grow during the deferral period?
Yes. Investments may grow depending on the annuity type.
Are deferred annuities taxed during accumulation?
Typically, earnings grow tax-deferred until withdrawals begin.
Can deferred annuities be converted to income later?
Yes. Payments can begin at a future date chosen by the policyholder.
Related Terms
