Triple Compounding -
The Power of Tax Free Growth

Because annuities are retirement vehicles, they have been granted special tax advantages. Interest income earned inside an annuity avoids all current tax liability. Taxes are only due when the funds are actually used for retirement or withdrawn for some other purpose. (see 2nd Half of the Story)

Because current taxes are avoided, the effects of compounded interest are accelerated and deposits grow much more quickly. Annuity deposits benefit from:

Triple Compounding
	Interest on Principal
	Interest on Interest
	Interest on the Taxes Avoided

This triple compounding can give your retirement accumulations an edge by dramatically increasing your nest egg. For a more detailed explanation of how compounded interest works see - The Financial Magic of Compounded Interest.

Consider for example $10,000 placed in a bank cd with $10,000 deposited in an annuity account, both earning 6% annual interest. The table below assumes a tax bracket of 28% and compares the results of each deposit. The tax advantage of the annuity is compelling to anyone wishing to accumulate funds. A higher tax rate would of course increase the advantage of the annuity deposit.

The results can be demonstrated more clearly in graphical form.

The above example is based on a 6% return, however, the higher the annual return, the greater the effect of compounding and tax free compounding. The graph below compares three rates of return.
The power of the tax free accumulations is clear. If the compounding is extended beyond the initial 10 year period, the effect accelerates.

The longer the compounding period, the greater the advantage of the tax favored savings.
Tax free compounding can dramatcially boost the performance of our retirement funds and other savings goals. There are four primary sources of tax free growth:

	Annuities
	IRA / Roth IRA
	401k Accounts
	ILIPP / FLIPP

Note: Municipal bonds are not included above, because they typically earn a lower rate of interest in exchange for their tax free status. Our planning aims to use tax free growth at the highest interest possible consistent with the safety of the funds deposited.

Note: Tax free annuities provide a tax deferral only. Taxes are not eliminated, they are merely postponed. Taxes on earnings inside an annuity are due at distribution. However, there are ways to lessen the eventual impact of income taxes on annuities. See the '2nd Half of the Story'

*These are hypothetical comparisons, solely intended to illustrate the advantage of tax deferral. It does not represent any particular investment or savings account; nor is it intended to recommend any specific course of action.

**Tax deferred annuities frequently carry a surrender charge of a specified duration. This surrender charge generally declines over a number of years. When selecting a tax deferred annuity, please consider the effect of this surrender charge on your planning. Withdrawals from a tax deferred annuity impose a tax penalty of 10% on distributions prior to age 59 1/2, unless those distributions meet certain extended payout requirements.