Measuring the Tax Benefit of a Tax-Deferred Annuity

Journal of Financial Planning, Forthcoming

22 Pages Posted: 11 Oct 2008 Last revised: 8 Sep 2009

David F. Babbel

University of Pennsylvania - The Wharton School - Finance and Insurance Departments; CRA International

Ravi Reddy

affiliation not provided to SSRN

Date Written: August 21, 2009

Abstract

In this study, we show how to measure the size of tax benefit arising from the purchase of fixed annuities - both deferred and immediate. We demonstrate how the size of tax benefit available from tax deferral depends on five factors: (1) the length of time the annuity is held during the accumulation and decumulation phases of ownership; (2) whether a deferred annuity is annuitized (either by conversion or by a 1035 exchange) at the end of the surrender period, or taken as a lump sum distribution; (3) the level of yields; (4) tax rates on ordinary income; and (5) the differential between tax rates on ordinary income and tax-preferred treatment of dividends and capital gains. We provide a set of formulae that can be used to estimate the size of tax benefit arising from tax deferral under varied scenarios.

JEL Classification: G12, H24

Suggested Citation

Babbel, David F. and Reddy, Ravi, Measuring the Tax Benefit of a Tax-Deferred Annuity (August 21, 2009). Journal of Financial Planning, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1281062 or http://dx.doi.org/10.2139/ssrn.1281062

David F. Babbel (Contact Author)

University of Pennsylvania - The Wharton School - Finance and Insurance Departments ( email )

215 Wakefield Road
Bryn Mawr, PA 19010
United States
610-527-1839 (Phone)

CRA International ( email )

John Hancock Tower
200 Clarendon Street, T-33
Boston, MA 02116-5092
United States
610-527-1839 (Phone)

Ravi Reddy

affiliation not provided to SSRN ( email )

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