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One of the major benefits of choosing a fixed annuity as a retirement savings vehicle is tax deferral, but do you know what that means? Let's review this concept in more detail.

Tax deferral is the means by which the payment of taxes on certain assets can be delayed until some future date. Tax-deferred assets grow untaxed, meaning interest compounds until the money is withdrawn.

Compounding is the process by which the money you earn from an investment can be reinvested to make more money. As a hypothetical example, let's say you invest $10,000, and it earns interest of 10% per year. In the first year, you will earn $1,000 in interest.

In the second year, you will earn $1,100 in interest. Why? Because both your initial investment of $10,000 and the additional $1,000 you earned in the first year earn interest ($11,000 total). Each year, you keep earning more: $1,210 in the third year, $1,331 in the fourth year. By the end of the fifth year, your $10,000 will have grown to $16,105.

Tax deferral is important for two reasons. First, because your investment returns aren't reduced by income taxes every year, you experience potentially higher overall returns during your annuity's accumulation phase. Second, it is possible that you may experience a lower tax rate when you withdraw the assets. Since you probably will not withdraw the assets you are accumulating in your annuity until later in life, when you could be in a lower tax bracket, you could minimize the taxes you have to pay on withdrawals. That is not true for everyone, but it is true for many.

There are also other tax-deferred investment vehicles. Which one is right for you? Forward Investment Services can help you decide if a fixed annuity is a good tax-deferred investment vehicle for your financial portfolio. Contact us for more information.