Making Sense of Tax Deferral in Annuities

First, there are no annual contribution limits for annuities as there are for most retirement plans. In 2019, you can contribute a maximum of $6,000 ($7,000 if you are 50 or older) to traditional IRAs and Roth IRAs, and a maximum of $19,000 ($25,000 if you are 50 or older) to deferred-contribution plans, such as 401(k), 403(b), and 457 plans. That allows you to save more money for retirement.

Second, annuities offer a guaranteed income stream for life. This can be particularly compelling for individuals who are concerned about market volatility, to which their other retirement plans are exposed. That said, how are annuities taxed? All of the money you invest in an annuity compounds, or builds upon itself. You don’t receive any sort of tax bill until you eventually make withdrawals, at which time some taxes will be owed, but the taxes will likely be less than if you had put the money in a taxable investment.

For example, if you make an annuity payment as a lump sum, the income taxes due will be calculated on the difference between the amount you paid into the annuity and its value when you take distributions.

In other words, if you invest $100,000 into an annuity, and that annuity is worth $250,000 when you retire at age 65, you will owe taxes on your gain of $150,000.

The IRS considers those gains ordinary income, not investment gains. This could prove highly beneficial as you weigh your investment options.

This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal, or accounting advice. We will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from use of this information. Seek competent professional advice and/or legal counsel.