Unlock Major Retirement Savings With These Hidden Annuity Tax Advantages

An annuity, or series of payments, is an insurance product that pays out income for retirement until death or until a future termination date. The monies paid in are invested on your behalf to earn income, and payouts can either be fixed (guaranteed) or variable (depending on the performance of the investments).

Tax

Annuity contracts are regulated by individual states but the Internal Revenue Code governs their tax treatment. Money paid into an annuity is not taxed until it is withdrawn from the plan. This means there is more money is available to the investors to use in growing your fund. If an employer also makes direct contributions to the plan, the employee has the benefit of further tax-free funds accumulating. When monies are eventually paid out of the plan they will be taxable.

Tax on Lump Sums

If the monies are paid out as a lump sum, income tax will be payable on the difference between what you have paid in and what is paid out. This will be taxed as ordinary income at the rate of income tax prevailing in the year the payout is made. There is no capital gains tax relief.

Tax on Fixed Annuity Payments

If you are to receive a series of fixed payments rather than a lump sum, part of these will be taxed as ordinary income. Tax will only be payable on the portion of the payment that has been earned by investment. The tax is therefore based on the percentage of the fund that has been gained by investment, (as opposed to what you actually paid in) and then divided over the expected payout period.

Tax on Variable Annuity Payments

As these payments will be subject to changes in the market, the taxable amount is calculated by dividing your investment by the period over which you expect to receive the annuity.

Surrender Fees

If you withdraw monies early from an annuity, you may be hit with surrender charges of up to 7%, usually applied if you withdraw funds within the first 5 to 7 years.