What does tax-deferred growth in annuities mean?

Tax-deferred growth in annuities signifies that the earnings generated within the annuity are not subject to taxation until the money is withdrawn. This means that during the accumulation phase of the annuity, the growth—such as interest, dividends, or capital gains—can compound without being diminished by taxes. As a result, the investor can potentially accumulate a larger sum over time compared to an investment that is subject to annual taxation on earnings.

When withdrawals are eventually made, those earnings are then taxed as ordinary income, which can lead to tax advantages, especially if the investor is in a lower tax bracket during retirement. This feature provides an incentive for individuals to invest in annuities, allowing them to maximize their investment potential over the long term without the immediate tax burden typically associated with other types of taxable investment accounts.