The very idea of taxes is not usually a favored topic or something we like to think about. Making decisions about your tax situation are not always easy (especially since it is one of the most off putting subjects to bring up), but when it comes to your annuities, there are certain things you’ll need to be aware of.
The appeal of any annuity is the fact that taxes are deferred on the income that is invested. Unfortunately, deferred is simply another word for putting off the payment of taxes owed until a later date. This is true for each and every type of annuity, including lump sum annuities or variable annuities.
Seasons of Deferred Annuities
There are two essential seasons when it comes to annuities that allow deferred taxation. The accumulation season and the distribution season. Seasons are simply a more elaborate way to explain that during the accumulation period, the money invested is allowed to grow and mature with interest without having to pay taxes. The distribution period is when the payout is made. This can be in a lump sum, i.e. lump sum annuity, or over a more extended period, i.e. lifetime. The smaller payouts are scheduled on a monthly or annual basis. In either case, taxes must be paid once the distribution season has started.
How Lump Sum Annuity Tax Payment Works
With lump sum annuities you will receive all of your money at once.
As an example:
- You invest $50,000 in RenoTransLife Annuity that will be worth $200,000 when you are ready for retirement at the ripe age of 62.
- The time comes to accept the lump sum of $200,000 and according to the federal government you just “earned” $150,000 for this year.
- Because you “earned” it, you have to pay the going rate for that particular tax bracket during that year.
Taxes to Pay on Annuitizing
If you have chosen the route of scheduled annuity payments, or annuitization, then you will pay in your current tax bracket. You will not have to pay on the entire amount accumulated at one time. Taxes will be assessed by the amount you have earned during the calendar year.
An example:
- You invest $200,000 in a fixed annuity which will payout $1500 a month starting at the age of 62.
- The federal government, actually the Internal Revenue Service, estimates that people live an additional 22.5 years after retirement so the total amount for your annuity will be $405,000. The calculation is 12X1500X22.5.
- The total minus your initial investment equates to earnings of $205,000.
- The IRS considers your $1500 a month to be made up of 49% of money being returned to you and the other 51% being actual “income”. This results in you paying taxes on a portion of the annual $18000 payments.
Regardless of which type of investment is made, lump sum annuity or variable annuity, if you do not make it to the ripe age of 62 your money does not simply disappear. Your beneficiary will receive it and pay the taxes required by the IRS.
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