It is important to note that the investor does not own the investments the annuity makes but does benefit from the investment. The insurance company owns the investment so the investor's savings are allowed to grow and all gains are tax-deferred. By way of comparison, investors in many mutual funds are unable to take advantage of this situation. Investors in a mutual fund pay a capital gains distribution at the end of the year whether or not the gains are reinvested. Compare that to the situation of an annuity, in which any profit made and kept in the annuity continues to grow tax-deferred.
Annuities offer the best benefits of other similar investment alternatives.
As is the case with an IRA, as long as gains made from the investment remain in the annuity account, no taxes are paid. Taxes are due only when funds are withdrawn. When annuities are compared to other investment vehicles with retirement goals and objectives, annuities stand out favorably. The interest in an annuity grows tax-free until funds are withdrawn so the returns are higher than similar taxable investment options. When the owner of the annuity takes money out, normally at retirement, he is in a lower tax bracket and so pays less taxes on money that has grown in a tax-deferred status.