Annuity Tax Considerations

In a tax deferred investment the money grows faster. This type of investment allows to defer taxes on one's earnings. With a taxable investment, one pay taxes on his/her earnings each year, which may leave him/her with less money to benefit from investment earnings. In an annuity if one is taking distributions then he/she has to pay taxes but at the same time the annuitant may be in a lower tax bracket.

Annuities do not provide any additional tax advantage when used to fund a qualified plan. Liquidated earnings are considered as ordinary income tax chargeable and it may also be subject to a contingent deferred sales charge or a surrender charge. If annuity is withdrawn or taken before the age of 59 ½ then 10% penalty may be charged.

You may be able to postpone payment of taxes if you are able to transfer or roll over your plan distribution to an IRA or another plan that accepts rollovers. Any after-tax contributions in the plan may be transferred to an IRA or another 403(b) arrangement in order to continue earning tax-deferred interest or investment gains; a transfer to another 403(b) arrangement must be done on a plan-to-plan basis but not a conventional rollover, but rollovers to an IRA are permitted.

Annuity Tax Considerations For Retirees

Every retiree needs an awareness of the possible tax traps they he may encounter as their income shifts from reliance on wages or self-employment income to retirement- based pensions, investment income etc. IRAs offer advantage through tax deferral, where the gains on any investments made in the account can accumulate free from taxes until money is withdrawn. IRAs also offer deductions for contributions.

All or some of contributions may be deducted directly from annuitant federal taxable income, depending on his/her AGI. Because IRAs are designed for retirement savings, there are generally penalties for withdrawing funds before age 59½; these withdrawals are also subject to ordinary income tax.

It should be noted that annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying an annuity to fund a qualified plan for the annuity's additional features such as lifetime income payments and death benefit protection