Using an annuity to protect against taxes

How an annuity can be instrumental in protecting your hard-earned money from the huge impact of taxes.

Article highlights

  • Tax-deferred investment
  • Various benefits to adding a Rider
  • Tax free sub-account transfers

You've always given everything for your family’s future, and, with the right strategy, you can ensure that you will fully benefit from the money you’ve saved for retirement. With tax rates reaching their highest levels in decades,1 minimizing tax exposure and safeguarding wealth and retirement income assets is more important than ever.

An annuity can play a key role in helping to protect your savings from today’s—and tomorrow’s—taxes, as you work toward planning for a reliable income stream through retirement.


Tax deferral

An annuity is a tax-deferred vehicle, meaning taxes on your assets within one are postponed, and only applied when the money is withdrawn. Deferring taxes within your portfolio can allow for more growth over the long term.

As with an IRA, deferred annuity withdrawals are intended to start at retirement age, but unlike IRAs, annuities are an even more flexible tax-deferred investing option, with fewer limitations. See the impact of tax-deferral on your potential investment growth with this calculator.

Tax-efficient income

Income from an annuity can be quite efficient in terms of taxation. For instance, you can add a rider (for an additional cost) to have withdrawals made from both the gains and a piece of your initial principal. When you receive this kind of payout, the only portion that gets taxed is the gains.

Furthermore, transfers between subaccounts are tax-free for annuities. For mutual funds, on the other hand, transfers may result in capital gains taxes.

Tax diversification

To help make the income from an annuity more tax-efficient, you can add a living benefit option (for an additional cost) to have withdrawals taken from the gains and your principal. When you receive this kind of payout, the only portion that gets taxed is the gains.

Tax planning is a crucial part of retirement planning—something that all too often goes unaccounted for. The impact of taxes in the future is unknown; in the face of this uncertainty, a tax diversification strategy that includes an annuity can give you the confidence that you will always have income available to you.

Take into consideration the implication of taxes on your financial future. Learn more here (PDF) or talk to your financial advisor about strategies to make the most of your money.

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1“Annuities: Breaking Myths and Building Income.” Lincoln Financial Group. 2016. 


Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Please consult an independent advisor as to any tax, accounting, or legal statements made herein.

A fixed indexed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments, or index. The index used is a price index and does not reflect dividends paid on the underlying stocks.

Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk, and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative, and advisory fees. Optional features are available for an additional charge. The annuity’s value fluctuates with the market value of the underlying investment options, and all assets accumulate tax-deferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Withdrawals will reduce the death benefit and cash surrender value.

Investors are advised to consider the investment objectives, risks, and charges and expenses of the variable annuity and its underlying investment options carefully before investing. The applicable prospectuses for the variable annuity and its underlying investment options contain this and other important information. Please call 888-868-2583 for free prospectuses. Read them carefully before investing or sending money. Products and features are subject to state availability.

Lincoln annuities are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, and distributed by Lincoln Financial Distributors, Inc., a broker-dealer. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so.

Contracts sold in New York are issued by Lincoln Life & Annuity Company of New York, Syracuse, NY, and distributed by Lincoln Financial Distributors, Inc., a broker-dealer.

All contract and rider guarantees, including those for optional benefits, fixed subaccount crediting rates, or annuity payout rates, are subject to the claims-paying ability of the issuing insurance company. They are not backed by the broker-dealer or insurance agency from which this annuity is purchased, or any affiliates of those entities other than the issuing company affiliates, and none makes any representations or guarantees regarding the claims-paying ability of the issuer.

There is no additional tax-deferral benefit for an annuity contract purchased in an IRA or other tax-qualified plan.