Tax Sheltered Annuity Plans Explained

Tax sheltered annuity plans have a design to help investments to grow without being subject to taxes. Not all types of annuities are tax protected. In fact, the only time that your annuity has protection is when the funds are in the annuity itself. The accumulation of the funds is safe from any type of income tax as long as the funds remain in the actual “vessel” of the annuity. If you are considering this type of investment, it is important to understand how it will work for you.

How Tax Sheltered Annuity Plans Work

When you put money into tax sheltered annuity plans, the funds are kept there long term, in most cases. The funds enter the account and are able to grow with proper investing. You can continue to add funds to the annuity over time. As long as the funds are in the plan, the growth is compounded because there are not income taxes levied on it. For this reason, the funds will grow in a compound manner. This means that the initial investment grows by the applied interest. Then, the new amount (the initial investment plus the earned interest) grows again by the applied interest. This happens repeatedly and allows the annuity to grow quite rapidly. For this reason, this type of plan can be highly valued but it will take a long period for them to grow to a large amount.

Over the Long Term

With tax sheltered annuity plans, the funds must be removed from the account under the Required Minimum Distribution laws. This occurs at the age of 70