If you purchase an annuity within an IRA or 401k or similar retirement account, you must take RMD's (required minimum distributions) and, worse, all of your withdrawals are fully taxable as regular income.
Though insuring for longevity may be a reason to do this, in most situations, annuities should not be purchased with retirement money because:
(1) you lose the tax benefit in the annuity monthly payments and
(2) the retirement account is already deferring taxes - so that idea is redundant.
If an annuity is purchased with after-tax money, no RMD's are ever required, and you only owe taxes on your interest and gains and not on the portion that is a return of your own money (your principal). Yes, it is true that stock market gains are taxed at regular income rather than at capital gains rates if you chose stock investments within your annuity. This, though, is more of a concern at the higher tax brackets and not nearly as much of a concern in lower tax brackets - yes, there is a difference but it may be as little as about 5% at the lower end.
Exclusion Ratio: This is a complicated calculation of how much of your monthly payment (when actually annuitizing) is considered a return of your own money versus interest/gains. To give you an idea only:
For a fixed, immediate annuity it is about 30-40% taxable and 60-70% non-taxable and the insurance company will calculate it for you. This is important because this can help you reduce taxable income versus a simple CD or Money Market strategy that creates 100% taxable interest.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.