What is the primary advantage of tax-deferred growth in annuities?

The primary advantage of tax-deferred growth in annuities is that investment earnings are not taxed until they are withdrawn. This feature allows the money within the annuity to grow at a faster rate compared to taxable accounts, as the entire amount can remain invested and compounding rather than being reduced by annual taxes on the investment earnings.

This means that during the accumulation phase, the annuity holder can potentially build a larger sum of money over time, as all earnings, including interest, dividends, and capital gains, can continue to grow without being reduced by tax obligations each year. Only when withdrawals are made will taxes be assessed, usually at the individual's ordinary income tax rate. This tax deferral provides a powerful incentive for individuals to save for retirement or other long-term goals.

The other options do not accurately represent the key benefit of tax-deferred growth. Withdrawals being penalized by the IRS pertains to early withdrawal penalties, which are not a benefit. The suggestion that the account balance is taxed at a lower rate or that contributions are tax-deductible relates to other financial products, such as certain retirement accounts, but does not capture the essential advantage of tax deferral in annuities specifically.