Do You Pay Taxes on Immediate Annuities?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Do You Pay Taxes on Immediate Annuities?

Yes, taxes are paid on immediate annuities, but the method varies based on the type of annuity. For qualified immediate annuities, taxes are due on all withdrawals. In the case of non-qualified immediate annuities, the exclusion ratio is used to determine the taxable portion. For deferred annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) that starts income immediately, withdrawals are taxed on a Last-In-First-Out (LIFO) basis. However, Roth IRA immediate annuities are tax-free.

Examples

  1. Qualified Immediate Annuities: If you invest $100,000 from a 401(k) into an immediate annuity, all withdrawals are taxed as ordinary income.
  2. Non-Qualified Immediate Annuities: If you invest $100,000 of after-tax money, the exclusion ratio determines the tax-free portion of each payment.
  3. Deferred Annuities with GLWB: If you invest $100,000 and immediately start withdrawals, the earnings are taxed first (LIFO).
  4. Roth IRA Immediate Annuities: If you convert $100,000 in a Roth IRA to an immediate annuity, the withdrawals are tax-free.

Conclusion

Understanding the tax implications of immediate annuities is crucial for financial planning. Qualified annuities are fully taxable, while non-qualified annuities use the exclusion ratio. Deferred annuities with GLWB are taxed LIFO, and Roth IRA immediate annuities offer tax-free income. This knowledge helps in making informed decisions about retirement income. Contact us today for a free quote.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, 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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