Careful with Tax-Deferred Annuities

TL;DR: Gains can grow tax-deferred, but be careful of the fees.

If you’ve maxed out on other retirement tax-efficient vehicles, here is another one – you can contribute to a tax-defered annuity. In these plans, any gains you get are tax-deferred until you withdraw, but to avoid a penalty you have to withdraw at an old retirement age (like with most retirement accounts).

However, there seems to be very little flexibility around what you can invest in, and if it’s like investing in an index you can achieve the same kind of “tax-deferral” by not selling your stocks/ETFs. The main advantage would be that taxes you’d otherwise pay on dividends can essentially be reinvested and taxed later, which is a real benefit, but this benefit is small and usually eaten up by higher management fees with tax-deferred accounts.

I personally am not super interested in this right now. If you’ve been suggested to use this, I’d say you should do your own research. (And if you end up deciding to use these accounts, I’d be curious to your reasons!)

Happy TDA(?)’ing!

TheJKW