How does a tax-deferred annuity differ from an immediate annuity?

A tax-deferred annuity is fundamentally designed to allow the invested funds to grow without being taxed until withdrawal, which means that the income payments from the annuity begin at a future date. This contrasts with an immediate annuity, which starts making payments to the annuitant almost immediately after a lump sum is paid into the annuity. By delaying payments in a tax-deferred annuity, individuals can benefit from the potential for greater overall growth of their investment, as compound interest works on a larger amount for an extended period before taxes apply.

This distinction in the timing of when payments start is crucial for individuals planning for retirement and seeking ways to manage their income stream. It allows for more strategic financial planning. Immediate annuities, on the other hand, cater to those who need regular payments right away, such as retirees looking for immediate income.

In summary, the key difference highlighted here is the timeline of when payments are received, with tax-deferred annuities providing future payouts, enabling a more effective accumulation of investment returns before taxation.