Tax deferral means your annuity earnings are not taxed in the year they are credited. Instead, taxes are postponed until you make withdrawals. This allows your money to compound on the full pre-tax amount, which can produce significantly more growth over time compared to a taxable account earning the same rate.
Why Tax Deferral Matters
Consider a $100,000 investment earning 5.50% for 7 years. In a taxable CD (assuming a 24% federal tax bracket), you pay taxes on the interest each year, reducing your effective compounding. In a tax-deferred MYGA, the full 5.50% compounds every year without reduction.
This is why the tax-equivalent yield of a fixed annuity is higher than its stated rate. A 5.50% MYGA in a 24% bracket produces the same after-tax result as approximately a 7.24% taxable investment. See our rate comparison page for current tax-equivalent yield data.
When Taxes Are Due
For non-qualified annuities, only the gains are taxed at withdrawal. For qualified annuities, the full amount is taxable. In both cases, gains are taxed as ordinary income, not capital gains.