Tax Deferred Annuity

Definition

• A type of annuity with two distinct phases: a savings phase where money is invested into the annuity, and a payout phase where income payments are made to the annuitant. Funds contributed to the annuity in the savings phase are not taxed; instead, taxes are deferred until the payout phase. The rationale behind a tax-deferred annuity is that by the time the annuitant receives income payments from the annuity, usually after retirement, the annuitant's income will be significantly less than it was when the contributions were initially made; as a result, the annuitant will be in a lower tax bracket and less will be paid in taxes.

Notes
More commonly known as a Tax Sheltered Annuity (TSA).

Synonyms
tax aid, tax deferment, tax postponement

Acronyms
TDA

Related Terms and Acronyms

• Annuity — Definition,
  • A regular periodic payment made by an insurance company to a policyholder for a specified period of time.
  • A financial instrument that disperses a number of payments over a set period of time.
• Charitable Gift Annuity (CGA) — Acronym, Canada, Very Important,
  • A method to facilitate charitable giving whereby an individual transfers assets to a charity in exchange for a tax deduction and lifetime retirement income payments from the charity.
  ➥ A form of planned giving.
• Deferred Annuity — Definition,
  • An annuity that makes payments to the annuitant at some date in future instead of immediately.
• Exchange — Definition,
  • A trade of property for other property or services. Like-kind property exchanges are a popular tax-deferral strategy.
• Life Expectancy Method — Definition,
  • A method of calculating the appropriate size of payments in an annuity's income phase by estimating the annuitant's life expectancy.
• Payout Phase — Definition,
  • The phase of a deferred annuity where the annuity begins to make payments to the annuitant.
• Private Annuity — Definition,
  • An arrangement where one party agrees to transfer ownership of an asset to another party (usually a beneficiary) in exchange for lifetime payments.
• Registered Retirement Savings Plan (RRSP) — Acronym, Canada, Very Important,
  • A savings plan introduced by the federal government to encourage Canadians to save money for retirement. The investment and the interest earned on it is sheltered: it will not be taxed as long as it is left in the plan.
  ➥ Tax deferred investment contribution used to reduce income tax.
• Single Premium Deferred Annuity (SPDA) — Acronym,
  • A deferred annuity funded with a single payment.
• Tax Deferral — Definition,
  • The postponement of taxes to a later year, usually by recognizing income or a gain at a later time. Remember, this only delays your tax liability; it doesn't eliminate it.
• Tax Sheltered Annuity (TSA) — Acronym, Important,
  • An arrangement where employees are given the option to make tax-deferred contributions to an annuity set up by their employer.
  ➥ See also Tax Deferred Annuity (TDA).
• Wraparound Annuity — Definition,
  • An annuity that allows the annuitant to control how funds in the annuity are invested.