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Deferred Annuity

A deferred annuity is a type of annuity contract that delays income payments until the investor elects to receive them. This financial product is often used for retirement planning as part of an IRA portfolio. Here’s a breakdown of its key characteristics:

  1. Deferred Income: Unlike immediate annuities, which start paying out soon after investment, deferred annuities postpone payments to a future date. This can be particularly beneficial for retirement planning, as it allows the investment to grow tax-deferred over a longer period.
  2. Tax Advantages: Within an IRA, a deferred annuity benefits from the IRA’s tax-advantaged status. The investment grows tax-deferred, meaning that taxes on earnings are not paid until the money is withdrawn.
  3. Investment Options: Deferred annuities often come with a range of investment options, such as fixed, variable, and indexed annuities. Each type offers different levels of risk and potential return, allowing investors to choose according to their risk tolerance and financial goals.
  4. Lifetime Income: Many deferred annuities provide the option of converting the account balance into a stream of income that can last for life, offering a stable income source in retirement.
  5. Death Benefit: These annuities typically include a death benefit, which guarantees that a specified amount or the account value will be paid to the beneficiary if the annuity holder dies before starting to receive payments.
  6. Fees and Surrender Charges: Deferred annuities may come with various fees, including management fees and surrender charges for early withdrawal. It’s important for investors to understand these costs before investing.
  7. RMD Considerations: Once the IRA owner reaches a certain age, typically 72, they must start taking required minimum distributions (RMDs) from their IRA, including the deferred annuity portion, according to IRS rules.

Deferred annuities can be a useful tool for retirement planning within an IRA, but they are complex financial products. It’s advisable for investors to consult with financial advisors to fully understand the benefits and potential drawbacks in the context of their individual financial situation and retirement goals.