Many retirees wonder

How Are
Annuities Taxed?

Many retirees wonder “how are annuities taxed?” First, it is important to know that when an annuity grows in earnings or due to potential interest, there are no immediate taxes. However, when you pull money out, you’ll need to pay taxes on the income you receive. With an annuity, taxes on that money don’t happen right now. Then, when you take money out, those dollars out of the account. Essentially, any potential interest adds to your account without incurring taxes at the time of interest payment. Then, you pay your tax on the money you withdraw.

You may also be able to maximize your retirement income due to how annuities are taxed. For instance, benefits from social security may go down if your yearly income goes up. Interest from CDs, bonds, savings accounts or other investments must report to the IRS. Therefore, you may find that your overall income increases. This may cause your social security amount to decline. However, with an annuity, interest earnings are not income right away. There is, of course, taxation on withdrawals, but the earnings on the annuity don’t affect social security income calculations.

IRAs, 401(k)s

and more

A 401(k), or a traditional IRA may also allow for a delay in paying taxes as well. However, deferring taxes could offer additional benefits via an FIA. As an example, fixed index annuities do not require a limit on how much you can place into it. The rules allow you to deposit as much as you would like, as long as you follow certain other conditions. You may have a 401(k), IRA, or another type of plan that qualifies for deferring taxes. In these cases, you’ll face a maximum contribution limit. So, an FIA could be another option for your retirement money.

A rollerover option may also be something to consider. An FIA may be a place to put your retirement account funds in certain situations. Of course, tax implications are different from person to person so be sure to seek proper advice. At Marathon Group Financial, we can help guide you to the options that are right for you.

Retiring Early?

What about early retirement?

How are annuities taxed if you retire early? Some tax savings may occur, depending upon your situation. For example, you may have additional tax benefits if all of the following conditions are true for you:

  1. You are younger than 59 1/2
  2. You have a lump sum coming to you from a 401(k) profit-sharing plan
  3. This entire payment was due to a severance package and/or early retirement

If you can say “yes” to each of the above statements, you may have options. For example, your money might have the right to “rollover” into an annuity, without paying taxes now. You may also be able to get to this money without penalty. Usually, taking money out for retirement before 59 1/2 creates additional costs and taxation. However, by setting up a “Substantially Equal Periodic Payment” (SEPP) plan, you might be able to take fund s from your account earlier. Potentially, this tactic could help gain access to money previously untouchable.

Contact us today to learn more. We’ll help you design a roadmap that’s right for you.

Now or Later? How Are Annuities Taxed?

Some tax benefits may occur if you buy an annuity with after-tax dollars as well. A fixed index annuity (FIA) foes through 2 main stages. The first is the accumulation phase. Next, is a stage in which you may get a payout. In the first stage (growth), your FIA may have an advantage, tax-wise. Specifically, an FIA may not have taxes until you take the money out. This means no income taxes on your premium payments. Instead, you pay tax when you pull money out. Even then, the tax you pay is the same as your ordinary income tax rate. Some retirees find that less immediate tax liability means better long-term retirement income.

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