Are Immediate Annuities Tax-Free?

Shawn Plummer

CEO, The Annuity Expert

Understanding Immediate Annuities and Taxes

Immediate annuities can be tax-free or nearly tax-free under certain conditions. Here’s what you need to know:

Funded with a Roth IRA

  • Tax-Free: If an immediate annuity is funded with a Roth IRA, the payouts are tax-free. This is because contributions to a Roth IRA are made with after-tax dollars, and withdrawals made after age 59½ are tax-exempt.

Funded with Cash in Low-Interest-Rate Environment

  • Nearly Tax-Free: When funded with cash in a low-interest-rate environment, an immediate annuity can be almost tax-free. This is because the interest portion of the annuity payment is lower in a low-interest-rate environment, reducing the taxable portion of the annuity payments.

Tax Implications to Remember

  • Tax on Interest: The interest component of annuity payments is taxable. The principal portion, which is the amount you paid into the annuity, is not taxed again.
  • Income Tax: If not funded through a Roth IRA, annuity payments are subject to income tax based on the individual’s tax bracket.

Related Reading: Are Indexed Annuities Tax-Exempt

Conclusion

Immediate annuities offer tax advantages, especially when funded with a Roth IRA or in a low-interest-rate environment. Understanding these nuances can help in effective financial planning. Contact us today for a free quote.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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