A. Yes, annuities have 5 tax benefits -
1. Tax-Deferred Growth
The money in your annuity grows tax free as the interest compounds. This creates an attractive accumulation opportunity because your money is able to grow on a yearly basis without being stunted by income tax payments.
2. Taxes are Levied on Profits Only
Unlike most other investments, taxes are only paid on gains when they are withdrawn. 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
Up to 85% of your Social Security benefits may be subject to federal income tax depending on your level of provisional income. Annuities generate tax-deferred income, which has no impact on your Social Security benefits, as long as the money stays in the annuity. Other "safe" products like CDs, savings and money market accounts and municipal bonds contribute to provisional income, which could drive up your benefits' tax.
4. Tax Reporting and Payment Flexibility
When you retire, you will likely to be in a lower tax bracket. If you wait until retirement to take distributions, you are essentially able to defer tax payments until it becomes more favorable to you. No reporting is required as long as income isn't taken out of the annuity.
5. Offsetting Gift, Estate and Income Taxes for Beneficiaries
You can use a single premium immediate annuity (SPIA) with a life-only payout to pass on assets you won't need in retirement to heirs tax-free through an established trust.