A tax annuity, also known as a tax-deferred annuity, is a financial product that allows individuals to save for retirement while deferring taxes on the investment gains until withdrawals are made. It is a type of annuity contract that provides tax advantages to the policyholder. Here's how it works:
1. Contributions: With a tax annuity, individuals can make contributions to the annuity account on a pre-tax basis. This means that the contributions are made with pre-tax dollars, reducing the individual's taxable income for the year.
2. Investment Growth: The funds in the tax annuity account can grow on a tax-deferred basis. This means that the investment gains are not subject to taxes until withdrawals are made.
3. Withdrawals: When the individual reaches retirement age and starts making withdrawals from the tax annuity, the withdrawals are treated as ordinary income and are subject to income taxes.
Tax annuities are often offered by insurance companies and can be a useful tool for retirement planning. They provide individuals with a way to save for retirement while potentially reducing their current tax liability. It's important to note that there may be penalties for early withdrawals from tax annuities, so it's generally recommended to keep the funds in the annuity until retirement.