Annuity Taxation

Annuity taxation will depend on what type of money you used to fund the annuity, pre-tax or post-tax. This is known as qualified or non-qualified. In this article, we will go over how both types of annuities are taxed.

Qualified

Qualified means that the annuity has been funded with pre-tax money. These annuities are subject to taxes and Required Minimum Distributions. RMDs are payouts you must begin taking within the year you reach your RMD age. Any withdrawals you take are subject to income taxes. But you are not subject to capital gains or losses.

Non-Qualified

A non-qualified annuity is funded with post tax dollars. They allow the opportunity for deferred tax growth. Additionally, they are exempt from RMDs. When you make withdrawals only the earnings are subject to tax as income. There are two ways you may have the taxable amount calculated. First, is straightforward, where growth is withdrawn until depleted and then you withdraw the principal. Second, is the exclusion ratio. This is a calculation that determines how much of your payments are taxable growth and how much is nontaxable principal. The equation is:

(Principal/Monthly Benefit) x Life Expectancy

The percentage generated is the amount of income you take will be principal and which will be taxable earnings.

Early Withdrawal

Both qualified and non-qualified annuities are subject to an early withdrawal penalty. If you make withdrawals before 59 ½ you are subject to a 10% penalty.

Your Annuity Taxation

Your annuity taxation is something you need to take into consideration when retirement planning. A tax preparer can help you plan ahead so you can be prepared.

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