What is a primary benefit of a deferred annuity?

A primary benefit of a deferred annuity is the tax-deferral on earnings until withdrawal. This feature allows the investment within the annuity to grow without being taxed until the funds are accessed. In practical terms, this means that the gains can compound over the years without the annual tax burden that might otherwise apply to interest or investment income.

This tax-deferral aspect is particularly beneficial for long-term savings strategies, as it can lead to a larger accumulation of capital over time compared to taxable accounts, where annual taxes can diminish the growth potential of an investment. Withdrawals are then taxed as ordinary income, but the delay in taxation allows for potentially better growth of the funds during the accumulation phase.

While other aspects of annuities may provide value, such as guaranteed payments for life or immediate access to funds, these are not the defining characteristic of deferred annuities. The tax advantages offered by deferred annuities are a significant incentive for many investors seeking to enhance their retirement savings.