| Annuity taxation is fairly straightforward at first glance. | | | | If you invested $200,000 in an annuity, and it grows to |
| Taxes are deferred on annuity income as long as it | | | | $450,000 by the time you retire, and you take that |
| remains in the plan. Eventually, however, monies in an | | | | total as a lump sum distribution, you owe taxes on the |
| annuity plan are taxed, so when, exactly, does annuity | | | | $250,000 your annuity has earned since your initial |
| taxation occur? | | | | investment. This is taxed as ordinary income |
| Deferred Annuities: | | | | determined by the tax rates in effect when you take |
| Deferred annuities have an accumulation phase and a | | | | the payment. No capital gains tax break is available in |
| distribution phase. Earnings grow on a tax-free basis | | | | this case. |
| throughout the years of the accumulation phase. In the | | | | Taxation of Periodic Annuity Payouts: |
| distribution phase, payouts from these funds are made, | | | | If you invest $100,000 in a fixed annuity that pays $750 |
| either as a series of regular payments over a specific | | | | each month for your lifetime, beginning at age 62, you |
| period of time or as a one-time, lump sum payment. | | | | will receive the payments for 22.5 years, according to |
| Regardless of the form of the payout, some income | | | | the life expectancy tables used by the Internal |
| taxes will be imposed on every annuity payment the | | | | Revenue Service. This means your annuity contract is |
| owner of the plan (the annuitant) receives from it. | | | | valued at $202,500. The exclusion ratio is 49.4 percent, |
| Lump sum payments incur income taxes on the | | | | so you can exclude $4,446 of the $9,000 total you'd |
| difference between the amount that has been paid | | | | receive over a year from your income. Ordinary |
| into the plan and the value at the time it is paid out, or | | | | income taxes are imposed on the remaining amount. |
| distributed. If you take your distributions as a series of | | | | Taxation of Variable Annuities: |
| regular payments, part of each payment is viewed as | | | | Taxation of variable annuities takes into account the |
| a return of your previously taxed investment, and part | | | | fact that you do not know how much an annuity |
| is treated as earnings. Income taxes are owed on the | | | | payment will be every month because the value of |
| earnings portion. The portion that is not subject to | | | | your investment will change as the market changes. In |
| taxation is determined via an exclusion ratio (your | | | | this case, exclusions are determine by dividing the |
| investment amount divided by the total amount you | | | | investment by the period of time you expect to |
| expect to get during the distribution period). | | | | receive the annuity. |
| Taxation of a Lump Sum Distribution: | | | | |