An Overview of Fixed Annuities Taxation

Most people who buy fixed annuities do so partly for the tax advantages. No other savings method offers so many tax savings properties, along with favorable earnings rates, as fixed annuities. The tax implications of fixed annuities reach wider than the accumulation, or savings, phase. To really understand how fixed annuities work; you first need to understand how taxation works throughout an annuity’s life.

The first thing to understand when buying fixed annuities is the difference between the types of money used to purchase annuities. Nonqualified fixed annuities are purchased with after tax funds – money that has already been taxed. Qualified fixed annuities are bought with money from a tax-qualified retirement plan, such as an employer’s 401k or a traditional IRA. With both nonqualified and qualified annuities, as long as your money resides in the annuity, it is tax-deferred, both interest earnings and principal. You will only be responsible for taxes on the interest earnings when you withdraw funds from the annuity. When you withdraw money from qualified fixed annuities, you’ll be responsible for taxes on the principal as well, since that money has never been taxed.

Additionally, there are limits to the amount of new money you can contribute to buy a qualified annuity. IRAs are capped at $5000 in 2008, and employer’s retirement plans allow you to defer only around $15,000 per year. Nonqualified fixed annuities allow you to save as much money as you want, with no limits.

When you buy fixed annuities, you are putting your money out of reach, in the issuing company’s hands. Specifically, committing your funds for a multi-year period allows insurance companies to offer their excellent interest rates. The government also discourages you from spending this money, by imposing a 10% penalty for taking withdrawals before age 59 1/2.

The tax deferral feature of fixed annuities is most useful if you’ll be in a lower tax bracket when you start withdrawing your funds or receiving payments. You’ll realize the massive tax savings a fixed annuity will give you once you retire. You can’t avoid taxes forever, but with an annuity, you are in control and get to decide when the timing is right for you to pay those taxes.

Learn more about fixed annuities and their tax saving properties by visiting FixedAnnuityDirect.com’s Web site or call 1-877-519-8599 to speak to an Annuity Specialist who will answer all your tax deferment questions.