Are Indexed Annuities Tax-Free?
Indexed annuities are not tax-free. The earnings from an indexed annuity are tax-deferred, meaning you don’t pay taxes on the earnings until you withdraw the money. However, there is an exception with Roth IRA indexed annuities. In a Roth IRA, contributions are made with after-tax dollars, and both contributions and earnings can be withdrawn tax-free in retirement, provided certain conditions are met.
Taxation of Indexed Annuities
- Regular Indexed Annuities: Tax-deferred growth; taxes are due upon withdrawal.
- Roth IRA Indexed Annuities: Contributions are after-tax; withdrawals can be tax-free.
- Regular Indexed Annuity: If you invest $10,000 and it grows to $15,000, you pay taxes on the $5,000 gain when you withdraw.
- Roth IRA Indexed Annuity: If you invest $10,000 (after taxes) and it grows to $15,000, you can withdraw the entire amount tax-free under qualifying conditions.
While indexed annuities offer tax-deferred growth, they are not entirely tax-free, with the notable exception of Roth IRA indexed annuities under qualifying conditions. Understanding these tax implications is crucial for effective retirement planning.
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