For Mark Roberts’ Use: Planning for retirement involves a web of complex decisions, and there is no single path that provides the answer for everyone. The decisions you ultimately make will depend upon many individual factors, but there is one thing everyone should consider: The tax implications of their retirement savings and income decisions.
If you’re considering an annuity to provide the income you will need in retirement, first you should understand the difference between qualified and non-qualified annuities. Each type of annuity comes with different tax benefits, and one or the other might work better for you.
A qualified annuity is almost always purchased with pre-tax money. You might be eligible for this type of annuity through your employer-sponsored retirement plan or an Individual Retirement Account (IRA). Later, when you retire, your withdrawals will be taxed as part of your regular annual income. If you purchase an annuity within your employer-sponsored sponsored retirement plan or IRA, you won’t reap additional tax benefits beyond those already offered by the plan.
You might also choose to purchase an annuity with after-tax dollars, outside of your retirement plan or IRA. These are known as non-qualified annuities. Since you have already paid taxes on your income before purchasing the annuity, only the earnings on the money within the contract will be taxed later in retirement.
Non-qualified annuities are taxed based on a “Last In, First Out” (LIFO) structure. This means that the withdrawals are first taken from accrued interest and are taxed as ordinary income. After the accumulated interest is paid out via distributions, your future distributions from your original investment won’t be subject to taxation.
Surrender charges are just more thing you should consider with regard to annuities. If you surrender the policy before age 59 ½, the money withdrawn could be subject to a 10 percent federal tax penalty. In most cases, an annuity is a good option only if you plan to leave the money alone and delay withdrawals beyond this age.
If you have more questions about annuities, call our office to schedule an appointment. We can review your retirement plans and individual circumstances, and help you decide if an annuity is right for you.
Disclaimer: Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.