Our Services: Annuities

Deferred Annuity Taxation

The growth of an annuity is tax-deferred. Until you make a withdrawal, no income needs to be reported, and therefore, no tax forms to file. This way, there is no immediate tax on your earnings. Effectively, your interest compounds your money without taxes.* Additionally, an annuity has no contribution limit. And, you can “rollover” the money in your traditional retirement account into an annuity instead.

Deferred annuity taxation may help maximize other sources of retirement income. For example, Social Security benefits may decrease if your annual income exceeds a certain amount. You must report this as income to the IRS if you earn it from, for example, a CD, or bonds. This extra income can cause your Social Security benefits to drop. However, if you store your money in an annuity, these earnings don’t count against you. Using an annuity to protect your money comes with quite a few benefits.

Retired couple enjoying the tax benefits of annuities

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Annuity Phases

A fixed indexed annuity contract has two main stages: Accumulation and distribution.

Your money is protected, and it grows tax-deferred. However, you must give it time to grow: You cannot withdraw money from your FIA until the date specified in your contract. The time before you withdraw money is known as the accumulation phase. The distribution stage begins when you start taking payments. You can specify how often you’d like to receive payments: Yearly, quarterly, etc. You also have choices about how and when you get your money: You may even choose to wait, letting your money grow more before withdrawing the money. FIAs do not include required minimum distributions (RMDs).

Deferred Annuity Taxation and After-Tax Dollars

You’ll have certain tax benefits if you purchase a fixed indexed annuity (FIA) using after-tax dollars. During the accumulation stage, you have a tax advantage. Your money grows tax-deferred. You don’t have to pay taxes on your returns until you actually withdraw the money. Even then, this is ordinary income tax. This feature could ultimately mean more money for you in retirement than with a traditional retirement account.

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Older couple enjoying a successful retirement after taking advantage of deferred taxation

Taxes on Annuities Vs. IRAs and 401(k)s

IRA and 401(k) retirement plan accounts also allow for tax deferrals. However, deferred annuity taxation can have some additional benefits. For example, an FIA has no contribution limit. You can put as much money into it as you need. So, an annuity could be a great option if you’ve already maxed out your IRA, 401(k), or other qualified plan/plans. Or, maybe you want no limits at all on your retirement income. An FIA may help you with this, too. You can often “rollover” your IRA or 401(k) into an FIA instead. This may be very beneficial to you. However, tax implications may vary, so be sure to seek a qualified tax advisor about this.

If you’re interested in what we’ve discussed thus far, you may want to contact us to schedule a meeting or attend one of our educational retirement seminars. We can discuss if an FIA might be the right choice for you!

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Early Retirement With Deferred Annuity Taxation

An FIA can provide additional tax-saving options for some early retirees. However, there are a few criteria that you must meet for these benefits to apply:

You must be under the age of 59 1/2
You must have received a lump-sum payment from your 401(k) profit-sharing plan
This lump sum payment must have been part of a severance or early retirement package

If all three of the above statements apply, you may be in the right circumstances. You may be able to roll over your money into an annuity policy without taxation. If you set up a Substantially Equal Period Payments (SEPP) program, there are also ways to access this money without penalty.

Grandfather and grandson enjoying the outdoors together in retirement.
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