For Mark Roberts’ Use: As you plan for retirement, you may be presented with several different investment options. It can be hard to know which savings vehicles to pursue, but one very important factor you should always consider is the tax benefits of all options.

At some point you may consider purchasing an annuity. In this case, the tax benefits will differ, depending upon whether you choose a qualified or non-qualified annuity.

A qualified annuity (such as those within an employer-sponsored retirement plan or an IRA) are usually purchased with pre-tax money. When you begin to take withdrawals after retirement, this money will be taxed as part of regular annual income. Remember that purchasing an annuity within an employer-sponsored retirement plan or IRA will provide you with no additional tax benefits beyond what you already reap through the retirement fund itself.

Annuities purchased with after-tax money (outside of your employer-sponsored retirement plan or IRA) are known as non-qualified annuities. These annuities are taxable once you begin taking withdrawals, but only the earnings on the annuity are taxed. If you purchased your annuity after August 13, 1982, earnings are taxed on a “Last In, First Out” (LIFO) basis. In other words, as you take withdrawals, the accrued interest is the first money taken out and taxed as ordinary income. Once the interest has been paid out, the initial investment is distributed without further taxation.

If you do decide to purchase an annuity, keep in mind that surrender charges usually apply if you surrender the policy its early years. If you surrender it before you reach age 59 ½, the money could be subject to a 10 percent federal income tax penalty. Talk to your financial advisor to determine whether an annuity would fit well into your overall retirement plan.