A. Annuity has the following 4 major tax advantages:
1. Tax-deferred growth
The money you put in an annuity grows tax free as the interest compounds. This creates an attractive accumulation opportunity because your money will be able to grow on an annual basis without paying any income tax during the year.
2. Pay tax on profits only
Unlike most other investments, you only pay tax on gains when you withdraw money out of annuity. This alleviates any worries about paying taxes on dividends, interest, or capital gains associated with most other financial products.
3. Reduce taxation of social security benefits
Fixed and indexed annuities generate tax-deferred income, which has no impact on social security benefits, as long as the money stays in the annuity. This contrasts to many other "safe" products such as CDs, savings and money market accounts and municipal bonds that all contribute to provisional income, which often causes more of the owner's social security benefits to be taxed.
4. Flexible tax reporting and payment
You can purchase an annuity, then wait till retirement to take distributions, in that time you're more likely to be in a lower tax bracket. You can essentially defer tax payments until it becomes more favorable for you to do so. No reporting is required as long as income isn't taken out of the annuity.