Annuity Tax Benefits

The saying goes that death and taxes are the only two certainties in life. Many annuities offer benefits to address both those issues. Most annuities offer a death benefit that helps you pass assets to your loved ones upon your death. Many policies also offer features that help you accumulate assets and generate income in a tax-efficient manner.

An annuity’s tax treatment depends on the type of policy. Immediate annuities are taxed differently than deferred annuities. Annuities inside IRAs may be treated differently than annuities that are not held inside a retirement account. Below are some of the different types of annuity tax benefits that could help you as you plan for retirement.

Tax Deferral

One powerful benefit of deferred annuities is that you aren’t taxed on your growth as long as the funds stay inside the annuity policy. Taxes on growth are deferred until after you begin taking distributions. This feature, known as tax deferral, is similar to the treatment of IRAs, 401(k) plans, and other qualified accounts.

Like your IRA and 401(k), you can’t take distributions from a deferred annuity before age 59 ½. If you do, you you may face a 10 percent early withdrawal penalty.

Income

It’s possible that your income distributions from an annuity could be taxable. However, the amount that is taxable depends on how you structure the distribution.

If you take your funds as a withdrawal from a deferred annuity, your gains will be distributed first. Those gains taxable as income. After you’ve withdrawn your gains, you can then withdraw your contributions on a tax-free basis.

Taxation on annuitized income is a bit more complicated. The annuity provider will calculate an exclusion ratio, which is the percentage of your payout that is not taxable. The exclusion ration depends on a number of factors including your age, your contribution amount, and your payout. Generally, annuitized payments are partially taxable.

Annuities Inside an IRA

An annuity is tax-deferred and IRAs are tax-deferred. What happens when you put them together? Not more tax deferral. The annuity is held inside the IRA, which means the annuity is subject to the IRA’s tax rules.

That means that withdrawals from an annuity held in a traditional IRA are taxed as income. Withdrawals from a Roth, however, would be tax-free, assuming that the Roth met all other requirements. Before purchasing an annuity inside an IRA, consult with a financial professional who can help you understand how the annuity could impact your tax planning.

Ready to discuss an annuity as part of your retirement strategy? Let’ talk about it. Contact us at America’s Annuity. We welcome the opportunity to help you analyze your needs and goals and develop a plan. Let’s connect soon and start the conversation.

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