What is the difference in taxation for taxable and tax-deferred investments?
When you invest in a taxable investment such as mutual funds, stocks or some bonds, any dividends or interest you earn during the year are considered taxable income. Also, if you sell the investment or the mutual fund money manager sells an investment and gives you a distribution, you’ll owe capital gains taxes. When you invest in the underlying securities of a variable annuity, growth is credited to your account but is not taxed in that year. You pay taxes only on money withdrawn. When you make a withdrawal, you’ll owe income taxes at your current rate on any portion of the withdrawal that is considered growth. For tax purposes, withdrawals are always considered interest first, so unless you begin to exhaust principal, you’ll owe taxes on the full amount of your withdrawal. In addition, because the IRS set up tax deferral rules in order to encourage Americans to save for retirement, if you make a withdrawal before age 59 1/2, you’re likely to owe a 10% federal tax penalty on the amoun
