Annuities and dividend-paying stocks work differently when it comes to income, taxes and risk. Annuities offer fixed or variable payments under a contract, often used for retirement. Dividend stocks pay income from company profits and may also grow in value. Which one works better depends on your needs for taxes, flexibility and risk.
Annuities vs. Dividends Stocks: What’s the Difference?
Annuities are contracts with insurance companies that offer income either immediately or at a future date. The payments can be fixed or fluctuate based on market performance. For example, someone nearing retirement might purchase a $250,000 fixed annuity that guarantees $1,200 per month for life, regardless of market changes. This creates predictable income but usually ties up the initial investment.
Dividend stocks represent ownership shares in companies that return part of their earnings to shareholders. These payments vary depending on the company’s profits and policies. Suppose an investor buys $250,000 worth of dividend-paying stocks yielding 4% annually. That could generate $10,000 per year, but payments might rise, fall or stop if company performance changes. Dividend stock itself could appreciate or lose value. Investors have the flexibility to sell or buy more shares at any time without restrictions or added costs.
While annuities prioritize stability and guaranteed income, dividend stocks offer growth potential and more flexibility. Investors seeking income need to weigh whether they prefer contractual certainty or the potential for increasing returns with market exposure.
Annuities are tax-deferred, meaning earnings aren’t taxed until withdrawn. Withdrawals are taxed as ordinary income, not at capital gains rates. For example, if someone invests $100,000 in a deferred annuity that grows to $160,000 and later withdraws $30,000, that entire $30,000 may be taxed as regular income, depending on the contract structure and whether it’s a qualified or non-qualified annuity. Dividend stocks are taxed in the year dividends are received. Qualified dividends are typically taxed at the long-term capital gains rate—0%, 15% or 20%—based on income level. Suppose an investor earns $6,000 in qualified dividends and falls in the 15% bracket; they’d owe $900 in federal taxes that year. Non-qualified dividends, by contrast, are taxed as ordinary income. The timing and rate of taxation differ significantly, influencing after-tax income. Annuities delay the tax hit but may lead to higher rates upon withdrawal. Dividend stocks generate current income with potentially lower tax rates.
Annuities can offer stability and predictability, but they also come with trade-offs in terms of cost, flexibility and complexity. While they appeal to those seeking reliable income, they may not suit investors who prioritize growth or liquidity. Dividend stocks can provide a blend of income and long-term growth, but they also come with market risk and income uncertainty. Investors may find them attractive for building wealth over time, though returns are not guaranteed and can fluctuate with company performance. Annuities may appeal to those seeking predictable cash flow and protection from longevity risk, especially in retirement. They shift investment risk to the insurer but often limit upside potential and flexibility. Dividend stocks, on the other hand, suit investors who can tolerate market fluctuations and are looking for income with growth potential. They offer more liquidity and the possibility of rising dividends, but without any guarantees. They are also far less complex, so it’s much easier to understand what you are putting your money into. Some investors may benefit from combining both—using annuities for baseline income and dividend stocks for supplemental growth. Whether you pick an annuity or a dividend stock will depend on whether you prefer a fixed structure or more flexibility. Annuities offer predictable payouts but less control, while dividend stocks allow for growth and income with more market risk. Using both can balance steady income with long-term growth. Photo credit: ©iStock.com/Zorica Nastasic, ©iStock.com/kate_sept2004, ©iStock.com/AmnajKhetsamtip Read the full article hereHow Are Annuities and Dividend Stocks Taxed?
2025 Ordinary Income Tax Rates
Tax Rate
Single Filers
Married Filing Jointly
Married Filing Separately
Head of Household
10%
$0 – $11,925
$0 – $23,850
$0 – $11,925
$0 – $17,000
12%
$11,925 – $48,475
$23,850 – $96,950
$11,925 – $48,475
$17,000 – $64,850
22%
$48,475 – $103,350
$96,950 – $206,700
$48,475 – $103,350
$64,850 – $103,350
24%
$103,350 – $197,300
$206,700 – $394,600
$103,350 – $197,300
$103,350 – $197,300
32%
$197,300 – $250,525
$394,600 – $501,050
$197,300 – $250,525
$197,300 – $250,500
35%
$250,526 – $626,350
$501,050 – $751,600
$250,525 – $375,800
$250,500 – $626,350
37%
Over $626,350
Over $751,600
Over $375,800
Over $626,350
2025 Long-Term Capital Gains Tax Rates
Filing Status
0% Rate
15% Rate
20% Rate
Single
Up to $48,350
$48,351 – $533,400
Over $533,400
Married Filing Jointly
Up to $96,700
$96,701 – $600,050
Over $600,050
Married Filing Separately
Up to $48,350
$48,351 – $300,000
Over $300,000
Head of Household
Up to $64,750
$64,751 – $566,700
Over $566,700
Pros and Cons of Annuities
Pros:
Cons:
Pros and Cons of Dividend Stocks
Pros:
Cons
Annuities vs. Dividend Stocks: Which Should You Invest in?
Bottom Line
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