Tax Deferral

A Fixed Index Annuity Offers Tax Advantages

During the accumulation phase of your contract, any interest growth is tax-deferred. If you purchase your fixed index annuity with after-tax dollars, you will only pay ordinary income taxes on your earnings – not on your premium payments – when you begin withdrawing money. Tax-deferred growth, compounded over time, may increase the amount of savings and income your fixed index annuity generates for your retirement. Tax deferral is also a benefit of traditional IRAs and 401(k)s. However, annuities don’t have any government-imposed contribution limits. Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential. Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit. So use an annuity to fund a qualified plan based upon features other than tax deferral, such as lifetime income options or the guaranteed death benefit.

Tax-deferred growth, which can compound over time, may increase the amount of savings and income your fixed index annuity generates for your retirement.

Factors That Influence How an FIA’S Indexed Interest is Calculated

When you purchase your fixed index annuity, you often can choose the index(es) to which you allocate your annuity’s value. You can also often choose the crediting method used to track changes in your selected index(es). Before we discuss those crediting method choices, let’s look at some other factors that will affect how your indexed interest is calculated.


Some fixed index annuities set a maximum rate of interest (or cap) that the contract can earn in a specified period (usually a month or year). If the selected index increase exceeds the cap, the cap is used to calculate your interest.

Participation Rate:

This determines how much of the index’s increase will be used to compute the indexed interest rate. If an annuity has a 100% participation rate, the contract would receive 100% of the indexed interest achieved in a given contract period, assuming, in this example, no cap or spread applies. Participation rates are generally applied after caps, and before a spread.


The indexed interest for some annuities is determined by subtracting a percentage from any gain the index achieves in a specified period. For example, if the annuity has a 4% spread and the index increases 10%, the contract is credited 6% indexed interest.

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