One of the major benefits of a deferred annuity is the ability to delay paying taxes on all of the gains. By kicking the tax-liability can down the road, you are essentially utilizing an interest-free loan of the government’s tax cut while you continue to enjoy compounding growth within your annuity. Moreover, the IRS allows your beneficiary spouse to stand in your shoes at your death and continue to defer taxes for their lifetime without any required minimum distributions. Even your children, if they are designated as your beneficiaries, are permitted under current tax law to take only relatively small amounts out each year from their inherited annuity based on their life expectancy. This concept is known as a non-qualified stretch annuity. If structured correctly, an annuity can be used to defer taxes over several lives.

However, if your annuity’s beneficiary is a trust, all of the funds in the annuity must be distributed to the trust, (and taxes paid) within five years of the owner’s death — even if the spouse is the trust beneficiary. Unfortunately trusts are taxed at the top tax bracket after only $12,500 of income.