How Are Annuity Payments Taxed?
How are Annuities Taxed? Annuities are tax deferred. What this means is that they are only taxed once the payout begins and you get paid.
The most popular aspect of annuities is their tax free status. As long as your money stays in the annuity, the government will not impost income taxes on the interest it may earn. Deferred annuities have two stages, the accumulation stage and the distribution stage.
In the accumulation stage, your annuity does just exactly that. It accumulates compounded interest untaxed and grows. When it reaches the distribution stage, your annuity is paid out. This payout may be in a lump sum, or distributed in scheduled payments for a specified length of time. Either way, income taxes will be levied against the profit of the annuity.
How are Annuities Taxed?
Annuities are taxed on the difference between what was initially invested in the annuity and what the annuity is worth when the funds are released for disbursement. Taxes on variable annuities are assessed a little differently. The amount you can exclude is calculated by dividing your investment by the by the length of time you expect to receive the annuity. Annuity payments are taxed based on when the annuity was bought. After August 13.1982, investments are taxed on a last in, first out basis. This means that the first money paid out will be taxed like ordinary income.
“If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax–free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax–sheltered annuity plan. Under the Simplified Method, you figure the taxable and tax–free parts of your annuity payments by completing the Simplified Method Worksheet.” (from IRS Tax Topic 411)
For any more information on “How are annuities taxed?” go to www.irs.gov
- Why Do People Buy Annuities?
- Why Should I Purchase A Fixed Annuity?
- Are An Annuity And An IRA Identical?
- What is the Difference Between a Deferred and an Immediate Annuity?
- At What Age Should I Buy Annuities?
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