Deferred Annuity: What Does It Mean?
A deferred annuity is an insurance contract where your money grows tax-deferred during an accumulation period before you start receiving income payments at a future date you choose. Unlike an immediate annuity that begins paying you right away, a deferred annuity lets your investment compound over time—often for years or even decades—before you flip the switch and start your income stream.
During the accumulation phase, your contributions earn interest or investment returns without being taxed, allowing your money to potentially grow faster than it would in a taxable account. You'll eventually pay taxes on the earnings when you take withdrawals or begin receiving payments. Many people purchase deferred annuities in their 40s or 50s as part of their retirement planning strategy, then begin taking income in their 60s or later.
Deferred annuities come in two main varieties: fixed deferred annuities, where your money earns a guaranteed interest rate, and variable deferred annuities, where returns depend on the performance of investment options you select. While the tax-deferred growth can be attractive, deferred annuities typically come with surrender charges if you withdraw money during the early years, and you'll face a 10% IRS penalty on earnings if you take money out before age 59½.
