By: Laura Adams

Cutting your taxes every way that’s legally possible is a smart way to keep more of your hard-earned money. Additionally, paying less tax on the growth of your retirement savings allows you to keep every dollar invested, so you can grow a larger nest egg that generates plenty of income when you need it.

There are a variety of tax-deferred accounts that you might choose, such as a workplace 401(k), a traditional Individual Retirement Arrangement (IRA) or an annuity. Using these types of accounts can be a huge advantage when compared to investing through taxable vehicles, such as brokerage accounts, CDs and bonds that require you to pay tax on growth every year.

A fixed indexed annuity is an insurance product that pays you income in exchange for your premium payment(s) according to a contract. It allows you to enjoy potential growth that’s linked to a market index (such as the S&P 500), while protecting your savings from any downside loss.

You can use this calculator to compare the tax advantages of saving with an annuity versus a taxable account: What Are the Tax Advantages of an Annuity? (Calculator)

Here are 3 tax benefits you’ll enjoy when you add a fixed indexed annuity to your financial portfolio outside of a qualified retirement account:

Tax Benefit #1: Your interest growth is tax-deferred

With a fixed indexed annuity, your deposits into the account are not tax-deductible; however, you don’t owe tax on your interest earnings until you or your beneficiaries receive money from the account.

Tax deferral is a powerful benefit because the money in your account can grow even faster. When compounded over time, your total savings can increase, generating more income for you to enjoy in retirement.

Tax Benefit #2: No annual contribution limits

Retirement accounts, such as a workplace 401(k) and a traditional IRA, come with annual contribution limits set by the Internal Revenue Service. On the other hand, annuities don’t have any government-imposed contribution limits.

You can save as much as you want every year and enjoy higher potential amounts of tax-deferred growth with a fixed indexed annuity.

Tax Benefit #3: Annuitized payments aren’t fully taxed

One of the most common ways to take money from an annuity is through regular payments over your lifetime, known as annuitization. These payments are a combination of your principal and interest earned, which means a portion of your income stream (your principal) won’t be subject to tax during retirement.

In addition to these great tax benefits, you can also include one or more riders to a fixed indexed annuity for additional financial benefits and security. For instance, you can opt to have lifetime income, guaranteed payments to your heirs or coverage for long-term care.

Using a fixed indexed annuity gives you the flexibility to cut your taxes and accomplish multiple financial goals using just one product. To learn more, be sure to watch this video: What Is a Fixed Indexed Annuity?

See also: 5 Myths About Fixed Indexed Annuities You Should Ignore