The most simple definition of a tax-deferred fixed annuity is a long-term investment vehicle that provides several tax advantages. More specifically, it's a contract between you and an insurance company for a guaranteed interest-bearing policy. This policy also guarantees certain income options. What the insurance company does is it credits interest to your principal investment, and you don't pay taxes on these earnings until you make a withdrawal or begin receiving an annuity income. Simply, your annuity investment earns a competitive return that is very safe.

Tax-deferred means postponing your taxes on interest earnings until a future point in time. In the meantime you earn interest on the money you're not paying in taxes. You can accumulate more money over a shorter period of time, which ultimately will provide you with a greater income.

Many people today are choosing tax-deferred annuities as the foundation of their overall financial plan instead of certificates of deposit or savings accounts. Although CD's and annuities are very similar there are significant differences between the two. The most important difference is that annuities allow for the deferral of the taxes due on the interest earned until the interest is withdrawn! By postponing that tax with a tax deferred annuity, your money compounds faster because you can earn interest on dollars that would have otherwise been paid to the IRS. Later, if you decide to take a monthly income, your taxes can be less because they will be spread out over a period of years. Like CD's, annuities have a penalty for early surrender, however most annuity contracts have a liberal "free withdrawal" provision.

You pay NO taxes while your money is compounding. You can also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. Tax deferral gives you control over an important expense - your taxes. Any time you control an expense, you can minimize it. The longer you can postpone this particular expense, the greater your gain when compared to the gain you would make with a fully taxable account.