If you collect Social Security, you likely are paying tax on that income. Would you like to potentially reduce or eliminate the tax? You can. Deferred interest on an annuity does not count into the total of your income for calculation of the social security tax. And even when you take the deferred interest, you will pay back only a portion of the previous tax savings. Because of these tax savings, a 7% annuity is really like getting 9% as illustrated in the example below:
Amount invested in annuity = $100,000
Interest paid = $ 7,000
Social Security Tax Saved = $ 2,082
Total Benefit = $ 9,082
Return = 9%
Assume you keep this annuity for 10 years and it accumulates interest at the 7% each year.
Your social security tax savings totals $20,820
(10 years x $2,082). If you remove all of your interest after the 10 th year (a total of $96,715 compounded at 7% annually), and assume you receive $18,000 of social security in that year, you pay $5,355 in tax on your Social Security income in that year. Thus, you saved $20,820 on Social Security taxes while you owned the annuity and you “pay back” $5,355 of that when you close out the annuity.
To conclude, when you look at an annuity, consider the interest PLUS the potential savings in the social security tax. If you would like to have the social security tax savings calculated for you, bring in your tax return or check off on the enclosed page.
hypothetical rate used for illustration