How Deferred Annuities Work for Long-Term Saving

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A deferred annuity is an insurance contract designed for long-term savings. Unlike an immediate annuity, which starts annual or monthly payments almost immediately, investors can delay payments from a deferred annuity indefinitely. During that time, any earnings in the account are tax-deferred.

The Benefits of Deferred Annuities

By using a deferred annuity, you keep several options available, including:

  • Adding funds to the account to increase the annuity’s value
  • Taking lump-sum withdrawals as needed (for significant expenses, for example)
  • Transferring assets to a different financial institution
  • Cashing out the annuity
  • Converting the annuity into a stream of payments at a later date
  • Leaving the assets to earn interest over time

Each option has fees or taxes that must be considered. You may have to pay income taxes, penalty taxes, surrender charges to the annuity company, or other charges when you take funds out of an annuity.


Annual fees are an important aspect of deferred annuities. Rider and sub-account management fees can amount to more than 1% of assets per year. As a result, it’s critical to learn about all of your alternatives—and review the details with a qualified tax professional—before you make any decisions.

How a Deferred Annuity Works

The term “annuity” refers to a series of payments. Traditionally, annuities provide lifetime income (retirement income, for example). When you use a deferred annuity, you don't necessarily ever have to turn the money into a systematic stream of income. Instead, you can simply make withdrawals as needed, take it all out in one lump sum, or transfer the assets to a different annuity or account.

Ultimately, a deferred annuity allows you to keep control over the money and keep your options open instead of irrevocably handing everything over to the insurance company in exchange for lifetime payments.

When used in that way, a deferred annuity is basically an account that also happens to have some of the features of an annuity: certain tax characteristics, and possibly guarantees made by an insurance company (including the possibility of a death benefit).


If you eventually decide to annuitize, you can select a payment option from your insurance company’s list of choices. For example, you might choose to receive income that covers your lifetime only, or you might prefer to have payments continue for your lifetime or your spouse’s lifetime (whichever is longer).

How Long Payments Can Be Delayed in a Deferred Annuity

The term “defer” refers to the fact that you wait to annuitize or take action on the annuity. Contrast that approach with an immediate annuity, which starts making payments more or less immediately after you purchase and fund the annuity.

Once you start taking payments from an immediate annuity, it’s difficult or impossible to stop the process and get your money back. But with a deferred annuity, you can wait—possibly forever—to annuitize your contract.

Adding Money to Deferred Annuities

Deferred annuities have an “accumulation phase,” which is the period of time before you annuitize (if ever). During that time, you can add funds to the account, assuming your insurance company and tax laws allow you to do so. For example, you might make lump-sum or monthly contributions to the account or just leave it alone.

However, it’s crucial to understand all of the rules related to adding funds. For example, if the account is an IRA, be mindful of annual contribution limits and eligibility requirements for contributions. The 2021 and 2022 annual contribution limit for IRAs is $6,000 ($7,000 if you're over age 50).

Withdrawing Money from Deferred Annuities

After the accumulation phase comes the "payout phase" of the deferred annuity, which is when you can receive withdrawals. Withdrawals after age 59 1/2 won't incur penalty charges. As mentioned, you can defer the annuity indefinitely, if you choose, or you can elect to receive payments in a number of different ways:

  • Lump-sum, which is one, taxable payment
  • Systematic withdrawal, in which taxable withdrawals are made periodically while the remaining funds earn interest
  • Annuitization, which pays out regularly for a specified period of time, usually until the recipient's death (or their spouse's death)

How a Tax Deferral Differs From a Deferred Annuity

Don’t confuse the timing of payments from a deferred annuity with tax deferral, which is another feature available from annuities.

With tax deferral, you generally don’t pay taxes on income inside of the annuity each year. Instead, you pay tax only when the earnings are removed from a tax-deferred account. Ideally, this allows you to benefit from compounding: You keep more money in the contract, reinvest your earnings, and earn more on top of those earnings.

The tax-deferral concept is similar to the idea of a deferred annuity: In both cases, you put something off for later (whether it's when you receive income from an annuity or when you pay taxes).

Why It's Important to Seek Professional Advice Regarding Deferred Annuities

Speak with a tax advisor or certified public accountant to determine the consequences of using annuities, as well as making withdrawals or transfers, before you do anything. They'll help you go in-depth on these complex insurance products (and the related and complicated tax laws).


Guarantees are only as strong as the insurance company making them, and it is possible to lose money in an annuity. Consult with a local, licensed insurance agent for more details.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Accessed Dec. 12, 2021.

  2. Internal Revenue Service. "When Can a Retirement Plan Distribute Benefits?" Accessed Dec. 12, 2021.

  3. Securities and Exchange Commission. "Annuities" Accessed Dec. 12, 2021.

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