It is very important to know what taxes you are supposed to pay from your annuity scheme. Otherwise, you might be labeled as one of the people who evade their tax obligations. Consequently, that can have bad results on your image or even some legal consequences. Therefore, at what point will you have to pay taxes within a fixed type of annuity?

To begin with, there is the need to understand that this type of annuities has two phases, which have different tax rules. The first phase is called the accumulation period. In this time, you are not supposed to withdraw large parts of your principal. It is supposed to grow for your later use. However, investors are allowed to withdraw up to 10% of their invested money every year. Therefore, when someone withdraws more than this amount, there is always a tax penalty of 10%. Other than that amount, you are not supposed to pay any other tax on either the principal or the earned interest.

The second phase of a fixed annuity is the distribution phase. During this time, you will decide how you will receive your payments from the insuring firm. This could be done periodically or as a lump sum. Irrespective of the method that you choose to receive your payments, you will be required to pay taxes on the interest amounts. This happens in different ways. One, when you receive a lump sum payment from your annuity, your principal will not be taxed but the interest earned will be subjected to the regular income tax rate. Two, for periodic payments, you could pay taxes on every payment that you receive or after receiving the entire principal.

With the first option, the insurer calculates the distribution amount of your invested money. You are not taxed on this payment. However, anything above that requires that you pay a tax at the rate of regular income. The second option means that you may not pay any tax for the payments received until they total to your principal. After that, you then start paying fixed annuity taxes.

Apart from these taxes imposed on the annuitant, most people would love to know if beneficiaries of a fixed annuity pay any taxes. Firstly, let us understand who a beneficiary is. A beneficiary is the person whom an annuitant names to receive payments on his (annuitant’s) behalf in the event of death before receiving all the payments. Depending on the agreement in the contract, the beneficiary can receive only the balance for the invested money or he could receive even the accumulated interests. Moreover, he usually has the choice of receiving the money either as a lump sum or as periodic payments.

For the beneficiary who receives only the principal amount of the deceased annuitant, he does not pay any taxes for fixed annuity. However, for the one who receives both the principal money and the earned interest, he has to pay some taxes. This is irrespective of whether he receives the payments as a lump sum or as regular payments; he has to pay taxes on the interest amounts just as he would on any other ordinary income tax. In other taxes, beneficiaries who have high incomes could be subjected to higher tax rates. In such cases, it is advisable not to annuitize but rather transfer the funds to another contract, which you will own.

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