What Does LIFO Mean in Relation to Nonqualified Tax-Deferred Accounts and Nonqualified Annuities?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Definition of LIFO

LIFO, an acronym for Last In, First Out, is a method used in accounting and finance to manage assets and inventory. In the context of nonqualified tax-deferred accounts and nonqualified annuities, LIFO refers to the order in which withdrawals are made.

Application in Nonqualified Tax-Deferred Accounts and Nonqualified Annuities

  1. Withdrawal Order: Under LIFO, the most recently added funds (last in) are withdrawn first (first out). This is particularly relevant for tax purposes.
  2. Tax Implications: In nonqualified annuities, LIFO can affect the taxation of withdrawals. Since earnings in these accounts typically accumulate tax-deferred, using LIFO means that gains are withdrawn first and are subject to taxation.

Example

  • Scenario: If you invest in a nonqualified annuity and the account grows due to interest or other capital gains, under LIFO, any withdrawals you make will first count as earnings and will be taxed as ordinary income.

LIFO in Nonqualified Accounts

FeatureDescription in Nonqualified Accounts
Withdrawal OrderMost recent contributions are withdrawn first
Tax ImpactWithdrawals are taxed as ordinary income
SuitabilityBeneficial for those expecting lower tax rates in future
Comparison to FIFOOpposite of FIFO, where earliest funds are withdrawn first

Conclusion

Understanding LIFO in the context of nonqualified tax-deferred accounts and nonqualified annuities is crucial for effective financial planning. It primarily affects the order of withdrawals and their tax implications. By using LIFO, investors might face immediate tax liabilities on their earnings. This knowledge is essential for managing investments and preparing for future financial needs.

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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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