What is a deferred annuity?

Definition of a deferred annuity

A deferred annuity is one of many types of annuities, and it helps you save money for the future in a tax-advantaged manner. Like a 401(k) or an IRA, it lets you save for retirement incrementally over time. However, an annuity is an insurance product, and it has some additional benefits over a traditional retirement account, like guaranteed income and generally no contribution limits.¹ Deferred annuities are often used in conjunction with 401(k)s or IRAs to address retirement goals.

With a deferred annuity, you have two phases: First, you pay into the account. Later, you receive income from the account. You set the date that the annuity changes from the accumulation phase to the payout phase. A deferred annuity should be considered if you are in your prime earning years, are looking for a way to save for retirement, and want the safety of guaranteed payments.

The difference between immediate and deferred annuities

With an immediate or instant annuity, you start receiving funds right away, but it needs to be funded with a large lump-sum payment. This type of annuity is sometimes called an income annuity, and it is often funded directly from another retirement account, like a 401(k). Deferred annuities, like other savings vehicles, allow you to add funds to the account slowly over time. That account grows tax deferred, and you receive payments at a future date based on your contributions and any growth. 

Deferred annuity costs

The premiums you pay into a deferred annuity can vary depending on your goals and financial situation. Like many other insurance products and similar to managed accounts, there are typically some fees, but they will vary depending on the type of deferred annuity. The minimum needed to start a deferred annuity can be as little as $1,000. Then, you can save for guaranteed income with contributions as large or small as you like.

Benefits of a deferred annuity

Deferred annuities can be used like other savings options to provide regular income at a future date, most often in your retirement years. The income they provide is guaranteed, and it often lasts for the rest of your life. It’s a way to help address concerns about outliving your retirement savings.

How does a deferred annuity work?

When you purchase a deferred annuity, you’ll decide on a date in the future when you want to start receiving payments. Usually this is at or near retirement age, but it doesn’t have to be. That date is the division between the accumulation and the payout phases of your annuity:

Accumulation phase: Make periodic payments

During the accumulation phase, you pay into the annuity account. As with many other retirement savings accounts, each premium is part of the principal. On top of the principal, there is a tax-deferred growth opportunity. That growth can be at a steady rate agreed upon when you purchase the annuity, or it can be based on market investments. See below for your options. 

Payout phase: Receive regular income

Once you move into the payout phase of your deferred annuity, you can count on receiving payments for the length of the annuity. Often this is for life, but it can be for a set period, too. This income is guaranteed, making it an attractive option for retirement savings.

Types of deferred annuities

If you are saving for retirement and are considering an annuity to guarantee income in retirement, there are a few different options for how you fund your annuity and how the tax-advantaged savings within the account can grow. Learn more about all your annuity options.

Fixed deferred annuity

A fixed-rate deferred annuity grows at a steady percentage year over year with compound interest. It provides no-risk growth, and can be a great way to diversify your portfolio and hedge against market losses. Read more about fixed annuities.

Indexed deferred annuity

The growth of index annuities is tied to a stock market index, like the S&P 500. These annuities tend to provide more predictable growth and often include caps on gains and losses. Read more about indexed annuities. 

Variable deferred annuity

In contrast, variable annuities are invested in variable investment options. They also offer market growth but can be more volatile. That means they could grow faster than other annuities, but they can also lose money.

Flexible-premium vs. single-premium deferred annuities

A single premium, as you would suspect, means you pay one large lump-sum payment into the annuity. Then, the account grows over time until you reach your payout phase. Single-premium annuities are more common with immediate annuities, but they can work for a deferred annuity as well. Most often, this is a good option if you receive a financial windfall, such as an inheritance or settlement. With a flexible premium annuity, you can adjust the periodic payments you make to fund the account. This can provide a lot of flexibility in growing your account. In times when you have a little more to put away, you can increase your premiums, and if times get lean, you can reduce them.

Tax-deferred annuities

Sometimes there is understandable confusion between a deferred annuity (the product) and the deferred taxes of an annuity. If you’re wondering if all annuities are tax deferred, the answer is yes, usually. Funds you put into annuities do grow tax deferred, as with 401(k)s and traditional IRAs, which can give a valuable boost to their growth. Learn more about how annuities are taxed.

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¹Guaranteed income is based on the claims-paying of the issuing insurance company.  Also, withdrawals may be subject to regular income tax and, if made prior to age 59½, may be subject to a 10% IRS penalty. Contractual surrender charges may also apply.

New York Life Annuities are issued by New York Life Insurance and Annuity Corporation (“NYLIAC”), a Delaware Corporation or by New York Life Insurance Company. Variable annuities are offered by NYLIFE Securities LLC, Member FINRA /SIPC. Both NYLIAC and NYLIFE Securities LLC are wholly-owned subsidiaries of New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010.