Tax-Deferred Growth: The Retirement Wealth Builder You Are Ignoring

Imagine two people each invest $100,000. One pays taxes on the growth every year. The other lets it compound tax-deferred. After 10 years, the difference is stark.

The person paying annual taxes on a 5% return in a 22% bracket effectively earns about 3.9% after taxes. The person in the tax-deferred account earns the full 5% compounded each year. Over 10 years, the taxable account grows to about $146,000. The tax-deferred account grows to about $163,000. That is $17,000 more, just from not paying taxes along the way.

This is the power of tax deferral, and it is one of the biggest advantages annuities offer. Your money grows without the drag of annual taxation. You pay taxes only when you withdraw, and by then you may be in a lower bracket.

CDs, bonds, and high-dividend stocks in taxable accounts all create annual tax drag. Annuities eliminate that drag during the accumulation phase. Over 15 or 20 years, the difference can be $20,000, $30,000, or more on a mid-sized account.

Tax deferral is not a reason to buy an annuity on its own. But combined with principal protection and lifetime income options, it makes the overall package compelling for many retirees.