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Deferred Annuity Explained
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In this video, we explain deferred annuity. • Start your free trial: https://farhatlectures.com/ • Deferred Annuity: An Overview • A deferred annuity is a financial product that delays income payments to a future date. It consists of an accumulation phase, during which funds grow on a tax-deferred basis, followed by a distribution phase, when payments begin. Deferred annuities are often used for retirement planning, allowing individuals to save money now and receive guaranteed income later. • Key Features of a Deferred Annuity • Accumulation Phase • During this phase, the investor makes contributions (either as a lump sum or in installments). • The funds grow tax-deferred, meaning taxes are not owed on earnings until distributions begin. • Distribution Phase • Payments are received as a series of regular installments or as a lump sum. • The start of this phase can be set to a specific date or triggered by an event, such as retirement. • Deferral Period • The period between the initial investment and the start of payments. • A longer deferral period allows more time for the funds to grow. • Tax Advantages • Contributions may be made with after-tax dollars, but the growth is tax-deferred until withdrawn. • Types of Deferred Annuities • Fixed Deferred Annuities • Offer a guaranteed rate of return during the accumulation phase. • Provide predictable, steady income during the distribution phase. • Variable Deferred Annuities • Allow investment in a range of funds, such as mutual funds or index funds. • Returns depend on the performance of the chosen investments, leading to potential income variability. • Indexed Deferred Annuities • Growth is tied to a market index, such as the S P 500, but typically includes a cap and floor to limit returns and losses. • Advantages of Deferred Annuities • Tax-Deferred Growth • Funds grow without being taxed until withdrawals are made, potentially resulting in greater accumulation over time. • Guaranteed Income • Provides a reliable income stream in the future, offering financial security during retirement. • Customizable Payout Options • Flexibility to choose between a lump sum, regular payments, or lifetime income. • Longevity Protection • Ensures a steady income for as long as the annuitant lives, addressing the risk of outliving savings. • Considerations and Drawbacks • Fees and Expenses • Deferred annuities may involve high administrative, surrender, and investment management fees. • Illiquidity • Funds are typically locked in until the distribution phase, with penalties for early withdrawal. • Tax Implications • Withdrawals are taxed as ordinary income, which can be disadvantageous if the annuitant is in a high tax bracket during retirement. • Inflation Risk • Fixed annuities may not keep pace with inflation, eroding purchasing power over time. • Applications of Deferred Annuities • Retirement Planning • Ideal for individuals looking to build a tax-deferred retirement nest egg and secure future income. • Estate Planning • Can serve as a way to leave financial security for beneficiaries, with some contracts including death benefits. • Wealth Preservation • Useful for those seeking to protect and grow assets while deferring income until needed. • Conclusion • Deferred annuities are versatile financial tools that provide a balance of growth and income for future financial needs. With their tax-deferred benefits and flexible payout options, they are particularly suited for retirement planning. However, it’s essential to carefully evaluate associated costs, investment options, and liquidity constraints to ensure they align with long-term financial goals. • #accountingexam #cmaexamprep #cpaexam
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