An annuity is an insurance product that pays out guaranteed income and can be used as part of a retirement strategy. The income you receive from an annuity can come monthly, quarterly, annually, or even in a lump sum payment. But what about Uncle Sam’s request for taxes on that money?
In general, the amount you contributed to the annuity isn’t taxed, but your earnings are taxed at your regular income tax rate. You fund a qualified annuity with pre-tax dollars, and a non-qualified annuity is funded with post-tax dollars. This impacts the tax treatment of your payouts; allowing you to save by investing and deferring tax payments.
For example, If you deposited $40k into a nonqualified annuity and the account grows to $100k, you will only be taxed on the $60k earnings/interest. Since the earnings are distributed first, taxes are paid upfront until you draw back down to the principal deposit.
Qualified annuities are subject to Required Minimum Distribution (RMD) guidelines. You must begin taking distributions from a qualified annuity by April 1 of the year after you turn 72.
Non-qualified annuities are exempt from RMDs. Once you start taking distributions from a non-qualified annuity, any interest or earnings within the annuity will be distributed before the premium or principal amount.
Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, There typically isn’t an annual contribution limit for an annuity. That could allow you to put away more money for retirement and the money you put into the annuity compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested working for you can be a significant advantage over taxable investments.
If you’re concerned about how taxes will affect your retirement income, or you’re interested in an annuity’s tax-free growth potential, we’d like the opportunity to answer your questions. Call our office today at (603) 261-3736.
Bob has a passion for making your money work hard for you. He takes profound joy in ironing out a plan for a long and comfortable retirement, no matter what your current income or level of wealth. With a work ethic second to none, he has a zeal for transforming uncertainty into stable ways for you to protect your future and your family. He knows that the quality of your life you enjoy today can remain as rewarding—or even better—after retirement.
With a strong background in information technology, Carol is instrumental in building operational policies and strategies that keep the organization functioning smoothly. Carol’s organizational skills and her flexibility to jump from priority to priority along with her commitment to customer service makes her an essential part of the Grimard Financial team. When Carol is not working with the Grimard Financial Family, she is a very creative and accomplished photographer.