A Tax Shelter Annuity Provides A Lifetime Of Income During Retirement

Many people planning for retirement wonder if a tax shelter annuity is more advantageous than an IRA or 401(k). It does not hurt to have both, if you can afford the investments. However, the tax shelter annuity provides lifetime income, while IRAs and 401(k)s last only until all the money is depleted.

What is a tax shelter annuity? A tax shelter annuity is an investment vehicle that allows you to accrue savings and additional income to use towards your retirement, similar to an insurance policy. The tax shelter annuity has a contract term, e.g., 10 or 15 years, and you purchase it by making payments into it while you are employed.

After you retire, you will receive a fixed monthly annuity payment for the remainder of your life. You also have the option to receive a lump sum payment, or rollover you tax shelter annuity balance into another investment vehicle.

The payments you make into the annuity are pre-tax dollars and provide the tax shelter relieving you of paying taxes. This will decrease the amount of money that you have to pay taxes on for that year. Also, this decrease may also place you into a lower tax bracket.

For example, if you make $30,000 per year and contribute 15 percent into a tax shelter annuity, the 15 percent or $4,500 is subtracted, leaving you with $25,500 of taxable income. Your $4,500 is sheltered from taxation. Additionally, you will not have to pay taxes on either the interest or earnings of your tax shelter annuity until you begin to withdraw the funds.

There are additional benefits to investing in a tax shelter annuity. Some annuities offer a death benefit which will pay 100% of the account balance to your spouse or designated beneficiary if you die prior to withdrawal. You will be required to pay taxes once you begin withdrawing funds; however, the tax rate will be lower since you will be making less money in retirement.

There is no limit to the amount of money that you can invest into an annuity. Many employers make matching contributions to employees' accounts. Some match five percent or even dollar for dollar. Still, some employers might make additional, equal contributions to their employees' accounts in order to receive tax benefits.

Americans are living longer in retirement and having continued income is a valid concern. A tax shelter annuity provides this income guarantee, but only if the insurance company is sound and stable. Therefore, choose your insurance company wisely to avoid a financial disaster.