How Does a Deferred Annuity Compare to Other Options?

A deferred annuity provides you with a way to save money for your retirement. Once you retire, the annuity will start to provide you with a regular retirement income. This is a viable way to save for retirement, but you do have several other similar options. Here are a few ways that deferred annuities compare to other options.

Deferred Annuities

The deferred annuity is a product issued by insurance companies. With the deferred annuity, you will be able to provide a certain amount of money to the insurance company, and they will then provide you with a regular payment once you reach retirement age.

Compared to 401k

Another common investment option is a 401k. With a 401k, you will be able to set aside a portion of your income on a tax-deferred basis. This means that you will be able to save more money for your retirement because you do not have to pay taxes as you would with a deferred annuity. With a 401k, you will also be able to receive matching contributions from your employer. This means that you will basically be getting free money for your retirement from your employer.

You are then able to invest the money in your 401k into the financial markets in order to obtain a return. The money is allowed to grow tax-free. When you purchase a deferred annuity, the gains from your investments will also be tax-free. You will only start paying taxes on the money from either option once you start to receive it upon retirement. With a 401k, you will be working with a financial broker that provides this type of account. This is different from a deferred annuity when you work with an insurance provider. Another key difference between these types of retirement options is the risk involved. With a 401k, you could potentially save thousands of dollars and then lose it by choosing a bad investment. With a deferred annuity, you are not choosing the investments, and you can count on a certain amount of money upon retirement. There are no such guarantees with the 401k.

Compared to an IRA

The IRA is another option that you have when saving for retirement. This option is very similar to the 401k except that it is an account that you open on your own instead of going through your employer. With an IRA, you will be able to invest $5000 per year toward your retirement. With an annuity, you could potentially invest much more than that. This means that for individuals who want to put away large amounts of money for retirement, the annuity might be the better option for them.

Compared to Roth IRA

The Roth IRA is a variation on the IRA that allows you to pay your taxes on the front end. You will be funding the account with after-tax dollars, but you will be able to avoid taxes when you start withdrawing money. With a deferred annuity, you will also fund your retirement with after-tax dollars. However, you will get no tax break once you start to receive your annuity payments.

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