A common concern many people have regarding fixed income annuities is in regards to their tax treatment. The concept behind fixed income annuities is actually quite simple. A fixed annuity is simply an insurance product which pays out a fixed income over a specified period of time. This payment is determined at the time of the contract and typically does not vary.
One of the most beneficial aspects of the fixed income annuity is the fact that you may receive payments out of the annuity for the span of the contract or the lifetime of the annuitant. These life annuities can provide a guaranteed income throughout the whole duration of your retirement.
On the surface, the tax treatment of fixed annuities is rather simple. In is when you dig into the details that the more complicated parts can emerge. Plainly stated, most annuities have tax-deferred growth, and are taxable upon payment distributions.
Tax-deferred growth means that any growth inside of the annuity account is not taxable until it is distributed to the beneficiary. This growth can provide very significant gains to the overall account value.
To determine the tax treatment of an annuity, you must separate it into two sections, taxable and nontaxable. The taxable portion is determined by the exclusion ratio established by the IRS. Take the total amount expected to be received by the annuity and divide it by the amount invested in the annuity. This ratio is then applied to each distribution to decide the applicable taxable and nontaxable amounts.
The portion of the contract that is non-taxable is generally the premiums paid, minus the previous non-taxable distributions and minus the value of any period certain or guaranteed features of the particular annuity contract.
A life annuity contract is generally more difficult to calculate than fixed period annuities. The difficulty with a lifetime annuity is determining the expected payout. Life expectancy tables prepared by the U.S. Treasury Department are used to determine life expectancy of the annuitant.
Despite the various disadvantages that fixed annuity contracts have, this type of insurance product can be a very effective retirement planning tool. The lifetime income and ability to preserve capital for the duration of your retirement is a very appealing feature of the product. Add in the various tax advantages, and the fixed annuity can be a quite useful financial planning tool. - 31884
One of the most beneficial aspects of the fixed income annuity is the fact that you may receive payments out of the annuity for the span of the contract or the lifetime of the annuitant. These life annuities can provide a guaranteed income throughout the whole duration of your retirement.
On the surface, the tax treatment of fixed annuities is rather simple. In is when you dig into the details that the more complicated parts can emerge. Plainly stated, most annuities have tax-deferred growth, and are taxable upon payment distributions.
Tax-deferred growth means that any growth inside of the annuity account is not taxable until it is distributed to the beneficiary. This growth can provide very significant gains to the overall account value.
To determine the tax treatment of an annuity, you must separate it into two sections, taxable and nontaxable. The taxable portion is determined by the exclusion ratio established by the IRS. Take the total amount expected to be received by the annuity and divide it by the amount invested in the annuity. This ratio is then applied to each distribution to decide the applicable taxable and nontaxable amounts.
The portion of the contract that is non-taxable is generally the premiums paid, minus the previous non-taxable distributions and minus the value of any period certain or guaranteed features of the particular annuity contract.
A life annuity contract is generally more difficult to calculate than fixed period annuities. The difficulty with a lifetime annuity is determining the expected payout. Life expectancy tables prepared by the U.S. Treasury Department are used to determine life expectancy of the annuitant.
Despite the various disadvantages that fixed annuity contracts have, this type of insurance product can be a very effective retirement planning tool. The lifetime income and ability to preserve capital for the duration of your retirement is a very appealing feature of the product. Add in the various tax advantages, and the fixed annuity can be a quite useful financial planning tool. - 31884
About the Author:
Be sure to check out Brian Atkinson at The Fixed Annuity Guide to learn more financial planning topics. The fixed income annuity can be used in creative and powerful ways.
