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How the Fixed Annuity is Taxed: Don’t be Lured by Tax-Deferrals

In the fixed annuity, the client’s investment is exempted of any tax while it is still accumulating. However, this does not mean that this annuity is tax-free.

Tax deferral is one of the chief advantages of the fixed annuity. Taxes are charged only upon the distribution of corresponding annuity income to the company’s clients and only when annuity owners withdraw an amount from the account. This may give the annuity owners a higher degree of tax control. Moreover, it gives the annuity account a greater potential for growth. It also allows earnings to compound without income taxation throughout the accumulation phase. However, tax deferral can be a disadvantage or an advantage, depending on how you play the game.

The annuity owner’s investment will grow free of tax while the annuity is still active. However, when the owner or the beneficiaries withdraw income, the income will be charged with the usual tax rate of the person who made the withdrawal.

FindAnnuitiesThis feature can be negative when the person who made the withdrawal has a high tax rate. If the person is in the highest tax bracket, he/she can be charged with as high as 33% of the annuity income that is withdrawn from the account. This 33%, the summation of the State and the Federal tax rate for the highest tax bracket, is more than double of the 15% capital gains rate. The capital gains rate is the tax structure applied on other investment options like mutual funds. On the other hand, tax deferral can be a positive feature when the person who made the withdrawal has a low tax rate. Because in fixed annuities, the owner decides when to withdraw income from his/her account, wise investors make large income withdraws when they are already in a lower tax bracket. In this way, the tax charged to their income is not high. Moreover, most annuity owners are in a lower tax bracket during their retirement than during their pre-retirement. When they withdraw income from their annuity during their retirement, they save up to 15% on tax. Because you are only charged with tax every time you withdraw from your annuity account, you are in control of when to pay your taxes.

Moreover, taxes can be postponed. This happens when the owner of the annuity dies and he/she named his/her spouse as the beneficiary of the annuity account. The turning over of the account is carried out without taxation. Moreover, the spouse (the beneficiary of the original owner of the annuity), can also transfer the annuity to an heir who can have as long as five years of additional tax deferral.

In order to bring the tax-related features of fixed annuity to your side and give you the best outcome from your investment, you have to always keep in mind that fixed annuities are not considered as a taxable income. Doing so can help you save tax from your Social Security benefits. By putting your taxable income into your fixed annuity, you are making it non-taxable. If you keep your taxable income under the threshold that triggers taxation of your Social Security benefits, you do not have to pay any tax at all.

In conclusion, if you are a wise investor and a good player in the annuity game, the fixed annuity might work for you in relation to investment features that are concerned with the payment of tax. This annuity allows you to minimize your tax expenditure by letting you choose when and how often you want to pay your taxes. When you withdraw from you annuity account, however, you will be charged with the regular tax rate.

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