Investing in annuities can provide tax-deferred growth, meaning you do not have to pay taxes on the earnings until you withdraw the money. This can help your investment grow faster compared to taxable accounts where you have to pay taxes on gains each year. Additionally, annuities can offer a way to potentially reduce your taxable income in retirement by spreading out withdrawals over time.

While annuities offer tax-deferred growth, there can be tax penalties for withdrawing funds before a certain age, usually 59 1/2. If you withdraw money before this age, you may face a 10% penalty on the earnings in addition to regular income taxes. It’s important to understand the terms of your annuity contract to avoid any unexpected penalties.

You can typically transfer funds from one annuity to another through a 1035 exchange without incurring taxes. This allows you to move your money to a better-performing annuity or one with more favorable terms without triggering a taxable event. However, it’s important to follow the IRS rules for 1035 exchanges to ensure a smooth transfer.

Beneficiaries of annuities may be able to receive the death benefit tax-free, depending on the type of annuity and the beneficiary’s relationship to the original owner. Spouses typically have more favorable tax treatment than non-spouse beneficiaries. It’s important to consult with a tax advisor to understand the tax implications for your beneficiaries.