Steve Kerby

Oregon Financial Group

Tax Options For Owning An Annuity

Annuities are financial products that provide a stream of payments in exchange for an initial lump sum payment or a series of payments. The tax treatment of annuities can vary depending on the type of annuity and the timing of payments. Here are some of the most common tax options for owning an annuity:

  1. Deferred Annuities: Deferred annuities are annuities in which the payments are deferred until a later date, typically when the annuity holder reaches retirement age. With deferred annuities, you pay no taxes on the earnings in the annuity until you start taking withdrawals.
  2. Immediate Annuities: Immediate annuities start paying out income immediately after purchasing the annuity. The payments after the investment basis is deducted from an immediate annuity are taxed as ordinary income, and you will be required to pay taxes on the payments you receive in the year you receive them.
  3. Qualified vs. Non-qualified Annuities: Qualified annuities held in a tax-deferred retirement account, such as an individual retirement account (IRA) or a 401(k) plan. Non-qualified annuities are annuities that are held outside of a tax-deferred retirement account. With qualified annuities, you will be required to pay taxes on the earnings when you withdraw the funds.
  4. Annuity Distributions: When you receive payments from an annuity, the distributions are generally taxed as ordinary income, except for any portion of the distribution that is considered a return of your original investment, which is not taxed.

It's important to note that the tax implications of owning an annuity can be confusing and depend on a variety of factors, including your personal tax situation and the specific terms of your annuity contract. It's always a good idea to consult a financial advisor or tax professional to determine the best tax strategy for your specific situation.

Here are some additional concerns regarding the tax aspect of owning annuities.

  1. Contributions to an annuity: Contributions to an annuity are typically made with post-tax dollars if you own a tax-deferred annuity.
  2. Investment earnings: Investment earnings within a tax-deferred annuity grow tax-free until you start taking distributions. At that point, you'll pay income tax on the amount of gain you withdraw.
  3. Distributions from an annuity: Distributions from a tax-deferred annuity are taxed as ordinary income on any gain removed. If you receive a lump-sum distribution, it may be subject to a 10% federal tax penalty if you are under the age of 59 and a half unless you qualify for an exception.
  4. Immediate annuities: With an immediate annuity, you receive regular payments in exchange for a lump sum of money. The tax treatment of these payments depends on how you paid for the annuity.
  5. Qualified annuities: Qualified annuities, such as those held in an individual retirement account (IRA) or a qualified retirement plan, are taxed differently than non-qualified annuities. Distributions from qualified annuities are taxed as ordinary income.

It's important to consult a tax professional for specific tax advice, as the tax treatment of annuities can be complex.

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Steve Kerby picture

Steve Kerby

Oregon Financial Group

5555 SW 196th Ave.

Aloha, Oregon 97078

(503) 936-3535

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