What are the tax advantages of an annuity?

Deposits into an annuity are not tax-deductible, however you don't have to pay taxes on the interest earned until you begin making withdrawals. This tax-deferral period can have a dramatic effect on the growth of an investment. Use this calculator to compare the tax advantages of saving in an annuity versus an account where the interest is taxed each year such as a CD.

Assumptions

Initial balance or deposit ?

The amount you're starting with, invested the same way in both the taxable account and the annuity.

Annual contribution amount ?

How much you add each year, before any planned increases.

Number of years for the analysis ?

How long contributions and growth are projected before withdrawal.

Before-tax return ?

The annual growth rate assumed for both the taxable account and the annuity, before any taxes are applied.

Table of Historic Rates of Return. Inflation 2.9%, U.S. Treasury Bills 3.3%, Long-term Government Bonds 5.0%, U.S. Large-Company Stocks 10.4%, and U.S. Small-Company Stocks 11.8%. Past performance is no guarantee of future results. Source: Ibbotson SBBI 1926-2024

Advanced options 1

Annual increase in contributions ?

How much your yearly contribution grows each year, such as a raise-linked increase.

Marginal Tax Brackets

During deposit(s) ?

Your marginal tax rate while contributions are being made, used to tax interest earned each year in the taxable account.

Table of Federal Income Brackets and Rates. Tax Rate For Single Filers For Married Individuals Filing Joint Returns For Heads of Households 10% $0 to $11,925 $0 to $23,850 $0 to $17,000 12% $11,925 to $48,475 $23,850 to $96,950 $17,000 to $64,850 22% $48,475 to $103,350 $96,950 to $206,700 $64,850 to $103,350 24% $103,350 to $197,300 $206,700 to $394,600 $103,350 to $197,300 32% $197,300 to $250,525 $394,600 to $501,050 $197,300 to $250,500 35% $250,525 to $626,350 $501,050 to $751,600 $250,500 to $626,350 37% $626,350 or more $751,600 or more $626,350 or more.

At withdrawal ?

Your expected marginal tax rate when the annuity is withdrawn, applied to the full deferred balance.

Enter your values and select Calculate.

The figure to focus on is the difference: how much more, or less, you'd end up with after tax by using a tax-deferred annuity instead of an ordinary taxable account, given the same contributions and the same before-tax return. A positive number means deferral worked in your favor over this period; it isn't a guarantee, just what falls out of the assumptions you entered.

Two inputs move that result the most. The before-tax return determines how much growth there is to shelter from annual taxation, so a higher return widens the gap. And the two marginal tax rates matter as a pair: the bigger the drop from your rate during contributions to your rate at withdrawal, the more the annuity's deferral advantage compounds into something real by the end.

This model doesn't include annuity fees, surrender charges, mortality and expense costs, or the details of a specific contract, all of which can eat into the advantage shown here. It also assumes tax rates stay exactly as entered for the whole period, which real tax law rarely does, and it leaves out any state taxes or required minimum distribution rules that could apply at withdrawal.

Treat this as a starting comparison rather than a final answer. Revisit it when your expected retirement tax bracket changes, when you get a raise that changes how much you can contribute, or when you're actually comparing a real annuity quote against a real brokerage account. Bringing this number to a tax or financial advisor before committing to a contract is a reasonable next step, and simply having run the comparison at all puts you ahead of most people weighing this decision.

This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.