Tax-Deferred Annuity

What Does Tax-Deferred Annuity Mean?

A tax-deferred annuity is a type of retirement plan available to employees of non-profit organizations, certain public education institutions, cooperative hospital service organizations, and self-employed ministers. It is referred to as “tax-deferred” because taxes are not applied until the individual begins withdrawing money from the annuity.

This type of annuity is also commonly known as a tax-sheltered annuity.

Insuranceopedia Explains Tax-Deferred Annuity

403(b) plans are an example of a tax-deferred annuity (TDA). These retirement savings plans are commonly offered to employees of government and non-profit organizations. Contributions to the account may be made by the employee, the employer, or both, depending on the plan’s structure. Employers often match employee contributions up to a specified limit. Alternatively, employees may make contributions through a salary reduction agreement.

Withdrawals from a TDA are taxed as ordinary income in retirement rather than at capital gains rates, which is one reason buyers compare the tax treatment of a TDA against other insurance-based products when planning, including the question of whether life insurance proceeds are taxable.

Tax-deferred annuities are a useful way to supplement pensions and/or Social Security income during retirement. Some people pair a TDA with a cash-value policy because permanent life insurance also lets the inside buildup grow on a tax-deferred basis, so both accounts defer taxes until money is taken out.