High-income earners often reach a point where traditional retirement accounts no longer provide enough room for all of their long-term savings.
After maximizing a 401(k), IRA, and other available tax-advantaged accounts, additional savings may end up in a taxable brokerage account. Depending on the investments held there, interest, dividends, and capital-gain distributions can create taxable income each year.
A tax-deferred variable annuity may provide another option for retirement savings. Here are five important concepts to understand.
1. Maximize Traditional Retirement Accounts First
Tax-deferred variable annuities are generally considered after available tax-advantaged retirement accounts have been evaluated.
For 2026, employees can contribute up to $24,500 to a 401(k), 403(b), or governmental 457 plan. Eligible participants age 50 and older can make an additional $8,000 catch-up contribution, while participants ages 60–63 may qualify for an $11,250 catch-up contribution.
The 2026 IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution for eligible individuals age 50 and older.
Once these accounts are maximized, investors seeking additional tax deferral may consider other strategies.
2. Variable Annuities Provide Additional Tax-Deferred Growth
A nonqualified variable annuity is generally funded with after-tax dollars. Earnings within the contract can then grow tax-deferred.
Taxes are generally not recognized each year simply because investments within the annuity increase in value or generate earnings. Investors can also typically move money among the contract’s available investment options without creating an immediate taxable event.
Unlike IRAs and 401(k)s, nonqualified annuities have no IRS annual contribution limit, although individual insurance companies may impose their own limits.
3. Tax Deferral Can Help Reduce Annual Tax Drag
A taxable investment account may generate interest, dividends, and capital-gain distributions that create taxes each year.
This ongoing taxation can reduce the amount of money remaining invested and available to compound.
A variable annuity can shelter investment earnings from current taxation while the assets remain inside the contract. This may be particularly relevant for investors who hold tax-inefficient investments and plan to keep the money invested for many years.
4. Variable Annuities Can Provide More Control Over Tax Timing
One potential benefit of tax deferral is greater control over when taxable income is recognized.
A high-income earner may be subject to a relatively high marginal tax rate during working years but expect lower taxable income during retirement. Deferring investment earnings may allow taxes to be postponed until withdrawals occur.
Nonqualified annuities generally also have no required minimum distributions during the original owner’s lifetime, providing additional flexibility over withdrawal timing.
However, tax deferral does not eliminate taxes. Earnings withdrawn from a nonqualified variable annuity are generally taxed as ordinary income. Taxable withdrawals before age 59½ may also be subject to an additional 10% federal tax.
5. Asset Location Matters as Much as Investment Selection
Tax-efficient retirement planning involves more than choosing investments. It also involves deciding which investments should be held in which types of accounts.
A 401(k), traditional IRA, Roth account, taxable brokerage account, and variable annuity each have different tax characteristics.
For some high-income investors, a variable annuity may serve as an additional tax-deferred retirement bucket after traditional retirement accounts have been maximized. Whether that strategy makes sense depends on factors including tax rates, investment time horizon, fees, liquidity needs, investment choices, and retirement income goals.
The broader objective is to coordinate these different accounts so that retirement assets are managed as tax-efficiently as possible over time.
Variable annuities are long-term investments subject to market risk, fees, expenses, surrender provisions, and contract terms. Withdrawals of taxable amounts are generally subject to ordinary income tax, and withdrawals before age 59½ may be subject to an additional 10% federal tax. This material is for educational purposes and is not individualized tax, legal, or investment advice.