The Deferred SIS: Defer Growth Up to 40 Years

Who this is for: three goals, not an age range

The deferred SIS is a tool, not a demographic. It fits anyone whose goal is one of these three:

• Retirement income (primary use): you're working now in a high bracket and want the SIS payments to start when your salary stops, so the gain lands in low brackets at retirement. Defer 10 to 30+ years.
• Beneficiary income stream: elect a start date after your death so your kids/spouse receive scheduled periodic payments. No stepped-up basis (the §453 obligation continues with the original basis), but the assignment company owes the income stream for the term you set, funded by the annuity it owns.
• Career-transition or sabbatical sellers: you're taking 3 to 10 years off and don't need income now. Defer until you re-enter or until your spouse stops working.

The standard immediate-start SIS pays you within 13 months of closing, which can be the wrong move when you already have salary stacking into the higher brackets. The deferred SIS pushes the start date out 5 to 40 years (the legal maximum under §453). During the deferral period, the full pre-tax sale price compounds inside a fixed annuity from a highly rated life insurer (A or better by A.M. Best or equivalent) at its fixed contract rate (currently ~4 to 6%, locked at issue).

Why stacking matters: the bracket effect

When you take a $2M gain all in Year 1, the gain stacks on top of your existing salary. Each tax bracket only applies up to a threshold; income above that gets taxed at the next higher rate. Stack the entire gain into one year and most of it lands in the top brackets. Spread the same gain across 20 years and each annual slice stays in the lowest bracket.

The math: a 35-year-old selling a $2M business

Seller is 35, makes $200K/yr in a steady job, sells a small business for $2M. Adjusted basis $200K. Capital gain: $1.8M.

Path A: Cash sale at age 35

• Capital gain stacked on $200K ordinary income → 20% federal + 3.8% NIIT + ~10% CA marginal + recapture
• Tax bill: ~$640,000 in Year 1
• After-tax proceeds: ~$1,360,000
• Net to seller at age 65 (30 years of MYGA compounding at 5%): ~$5,880,000

Path B: Immediate-start SIS at age 35

• SIS pays monthly for 30 years starting immediately
• Annual gain recognition: $60K/yr stacked ON TOP of $200K salary
• Stays in middle brackets but loses the "compress to lowest bracket" advantage because salary fills the lower brackets first
• Net to seller over 30 years: ~$2,150,000
• Worse than cash if reinvested aggressively: the SIS yield doesn’t beat 30 years of equity compounding

Path C: Deferred SIS, start payments at age 65

• Full $2M sale price is assigned at age 35 to an assignment company, which funds a 30-year deferred-start schedule with a fixed annuity
• Zero gain recognition for 30 years; the entire $2M compounds tax-deferred inside the contract
• At age 65: contract value has grown to ~$5.4M (illustrative assumption: a 3.5% fixed rate; the actual rate is quoted at placement)
• Payments begin at age 65: $300K/yr for 20 years
• By this point, seller is retired; other income is Social Security + a small pension, maybe $50K
• Annual gain recognition stays in the 15% LTCG bracket, NO NIIT, NO §453A interest charge (premium under $5M threshold)
• Net to seller over 20 retirement years: ~$5,200,000 after tax
• Plus principal preservation: if seller dies during payout, remaining payments go to heirs

Why this only works with the right carrier

Immediate-start SIS placements use name-brand A+ AM Best fixed-annuity carriers. These carriers do NOT offer deferred-start structures longer than ~13 months; their products aren’t designed for it.

Deferred SIS (income starts 1-40 years out) requires a specialty insurer that writes deferred-start schedules for §453 placements. The illustrations on this page assume a fixed annuity at the stated rate; the actual insurer, its rating and the contract terms are identified in writing before you sign. Only a few insurers write deferred-start schedules, and the annuity is placed through a brokerage firm.

Feature	Immediate-start SIS	Deferred SIS
Income start	Within 13 months of closing	5 to 40 years out
Carrier type	A+ AM Best fixed-annuity	Specialty insurer (rating disclosed at quote)
Yield mechanic	Fixed (locked at funding ~4.5%)	Fixed rate assumed in these illustrations (actual terms quoted at placement)
During deferral	N/A (no deferral)	Principal compounds tax-deferred
Gain recognition	Starts Year 1	Deferred until income starts
§453A interest charge	Applies if premium >$5M	Applies if premium >$5M (same rule)
Best fit age	55-75 (retired/semi-retired)	25-55 (still working full-time)

The age-and-income decision tree

Real scenarios: when deferred SIS dominates

• Software engineer, 38, sells RSU windfall: $1.8M long-term gain, FAANG salary $400K, wants to retire at 55. Defer SIS 17 years → income starts at 55 when they quit.
• Founder, 42, exits startup for $3M: staying on as advisor at $250K, wants income to start at 62. Defer SIS 20 years → tax recognition lands in low-income retirement years.
• Inherited rental property, 50, full-time job pays $180K: sells property for $1.5M with $1.3M gain. Defer SIS 15 years → income starts at 65.
• Small business owner, 45, sells to private equity for $4M: taking 6-month break, then re-entering consulting at lower comp. Defer SIS 20 years → start at 65.

⚠ Critical: the deferred-period growth IS taxable when payments start

This is the part many sellers miss when modeling a deferred SIS. During the deferral period, no payments come out and no gain is recognized, but the principal grows inside the carrier contract at the locked rate. When payments finally begin, you owe tax on TWO things each year:

1. Pro-rata gain recognition: your original capital gain from the sale, spread across the payout years (taxed at LTCG rates, typically 15% in retirement brackets)
2. The deferred growth (interest): every dollar the carrier credited during the deferral period gets taxed as ordinary income as each payment is received (at your marginal rate when payments start)

Worked example: $4M deferred SIS, 25-year deferral, 20-year payout

Phase	What happens	Tax recognized
Year 0 (closing)	$4M premium funds the contract	$0 tax; no payment received
Years 1-25 (deferral)	Principal compounds at an assumed 4.5% fixed rate → grows from $4M to ~$12M	$0 tax during deferral; no payments yet
Years 26-45 (payout)	Assignment company pays ~$760K/yr for 20 years ($15.2M total over the payout phase)	Each payment taxable: gain portion at 15% LTCG + interest portion at marginal ordinary (likely 12-22% in retirement)
Total tax over payout	Gain ($3.7M original) at 15% + deferred growth ($8M) at 12-22%	~$1.5M to $2.1M total

Why this still beats cash even with the deferred-growth tax

Cash sale at age 38 forces you to pay tax on the $3.7M gain TODAY at top brackets (you’re in your peak earning years). That’s ~$1.4M tax in Year 1. Then you have ~$2.6M to invest. Even at 5% MYGA compounding for 25 years to age 63 = ~$8.8M before annual interest tax. Deferred SIS gets you to ~$15M gross over the same 45-year horizon, even after the deferred-growth tax. Net advantage: $3-5M.

The key insight: even though the deferred growth IS taxable when payments start, it’s taxed at YOUR RETIREMENT-AGE bracket (much lower) instead of your peak-earning bracket. That bracket shift, combined with 25 years of tax-deferred compounding on the FULL pre-tax principal, is what makes the deferred SIS work for younger sellers.

What if you change your mind mid-deferral?

Like all §453 placements, the deferred SIS is non-commutable: once funded, the deferral period and payment schedule are locked. You can’t pull the cash out early. That lock is deliberate: non-commutability is what preserves the §453 installment treatment. If commutability is a deal-breaker for you, deferred SIS isn’t the right structure.

You can take CASH at closing + defer the rest

This is the most under-explained feature of any SIS placement. You don’t have to put 100% of the sale into the structure. The cash carve-out is whatever percentage you choose:

• $2M sale, $400K cash at closing + $1.6M into deferred SIS
• $3M sale, $1M cash + $2M into deferred SIS
• $5M sale, $1.5M cash + $3.5M into deferred SIS

The cash portion is taxed normally Year 1 (you owe the cap-gains tax on that slice). The structured portion is whatever percentage you keep inside the SIS. Your cash carve-out covers immediate needs (a house downpayment, paying off debt, funding college, building an emergency fund) while the structured portion compounds tax-deferred for the long pull.