Deferred Annuity Taxation

An annuity contract grows, tax-deferred, without a contribution limit. Until you make a withdrawal, the is no income that 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.*

Deferred annuity taxation can help to maximize other sources of retirement income as well.

For example, Social Security benefits may decrease if your annual income is over a certain amount. If you earn from bonds, or accounts like CDs, you must report this as income to the IRS.  In some cases, this extra income causes your Social Security benefits to drop. However, if you place your money in an annuity, these earnings do not count against you. Keeping your money in an annuity, clearly, comes with quite a few benefits.

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After-Tax Dollars and Deferred Annuity Taxation

If you purchase a fixed indexed annuity, or FIA, with after-tax dollars, you’ll enjoy certain tax benefits. An FIA has two main parts: The accumulation phase, and the distribution, or payout, phase. During the accumulation phase, you have a tax advantage: It grows tax-deferred. You don’t have to pay taxes on your returns until you withdraw money. Even then, this is only ordinary income tax. This could ultimately mean more money saved for your retirement.

Deferred Annuity Taxation Vs IRA and 401(k)

Traditional IRAs and 401(k)s allow for tax deferrals, too. However, deferred annuity taxation can have some additional benefits. For example, an FIA has no government-defined contribution limit. You can put as much money into it as you need. So, if you’ve already maxed out your 401(k) or other qualified plans, a fixed indexed annuity could be a great option.

Or, maybe you want no limits at all on your retirement income. An FIA may help you with this, too. In many cases, you can actually rollover your IRA or 401(k) into an FIA instead. 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 reach out to us to schedule a meeting. We can discuss if an FIA might be right for you!

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Early Retirement and Tax Deferral

FIAs may be able to provide additional tax-saving options for some early retirees. Here are a few key criteria that you must meet in order for these benefits to apply:

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

If all three of the above statements apply, then you may be in luck! You may be able to rollover your money into an annuity policy, without taxation. There are also ways to access this money without penalty if you set up a Substantially Equal Period Payments (SEPP) program.

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