Tax Sheltered Annuity Explained

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A tax sheltered annuity is a supplemental retirement program. The most common of these is the 403b program that is paid into by the government for government employees. Under this particular type of retirement investment, eligible employees can put funds away into an account that is tax advantaged or does not require the growth on the income within the fund to be taxed until the funds are withdrawn from the account. The investments made into a tax sheltered annuity are pre tax funds, though in most cases there is no employer match.

Where do the funds go within a tax sheltered annuity? Anyone who is considering investing in any type of investment like this should learn about all of their options and as such they should know what happens to the investments they make into this type of program. In short, the annuity is funded by the employee. The funds from the employee are placed into various investments. The most common types of investments associated with these annuities are mutual funds. This does mean that there is some risk involved in the various types of investments made.

Another important consideration for the investor who is considering tax sheltered annuities is the benefit of the fixed or variable rate that is paid. The funds in the annuity do accumulate interest and that interest, over time, compounds quite nicely for the individual. There are various types of interest scenarios though and investors do have to make the right decisions in terms of what type of investments need to be considered. For example, in tax sheltered annuity investments with a fixed interest rate, the monthly payment made later on will remain the same throughout the period of time the annuity pays out for. That is because the interest rate stays the same over this period as well.

On the other side of this is the variable annuity where the interest rate will change based on how well the underlying investments perform. This variable annuity may be a wide range of different mutual funds but they are traditionally more risk than others are. This equates to a more risky investment for those who use this type of investment strategy. With that understood, note that the potential for the variable rate tax sheltered annuity, there is the potential to earn more if the performance of the underlying funds is positive.

For those who are considering investing in a tax sheltered annuity, look at for what your options are. For example, you may want to check out the past performance of the annuity holder before you invest in the fund. You should learn about the annuity ratings too which is a direct reflection on what the funds are considered in terms of quality. For many people who would like to put funds in a retirement plan, but have been otherwise unable to do so, the tax sheltered annuity investments can be an ideal selection because of the overall tax savings that accumulates over time with this investment.

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