Annuities

Tax-Deferral

Deferring Taxes on Retirement Income With Annuities

Is your retirement income taxed when you have an annuity?
Well, one of the main benefits of an annuity is usually that you get deferral on the taxes.

When your annuity gains interest, you aren’t taxed right away. Instead, you don’t have to pay taxes until you take the money out. And, even then, you only pay regular income tax. This is a major benefit of using an annuity to save for retirement, that many people may appreciate.

For example, those with Social Security benefits. Any income you get, from working or from interest on investments, will count towards your total household income. For some people, additional interest would reduce their Social Security benefit amount. But, with an annuity, the income is only counted when you withdraw the money. Because of this, the potential index interest in your annuity policy does not impact your Social Security benefit amount. Of course, always consult with a tax advisor on matters like this.

granddparents laughing outdoors with their grandchildren in tree house taxes on retirement income

Buying an Annuity With Post-Tax Money

If you by an annuity with post-tax money, there are some potential benefits. Remember, an annuity, specifically a fixed indexed annuity, comes with two distinct phases. First, the accumulation phase. Then, the distribution phase. During the first phase, an FIA may have a tax advantage. It may be able to grow tax-free,* with no taxes* on premium payments. However, you will still pay income taxes on the money when you withdraw it.

Taxes on Other Retirement Accounts

When it comes to traditional retirement accounts, like IRAs or 401(K)s, you may be able to defer the taxes on the interest from them, too. This can be done by “rolling over” the money in your account into an FIA (fixed indexed annuity.)

Furthermore, there’s another benefit to doing this. With an IRA or 401(K), there are rules about how much you can contribute each year. This is what’s called a CAP. An FIA has a higher CAP than most traditional retirement accounts.

Retire Early with an Annuity?

An FIA may allow you the chance to retire early. However, only if a specific situation applies to you. If you meet all the conditions below, then an FIA may be able to help you with this:

  1. You are under the age of 59 1/2
  2. You have received a large payment from your 401(K) profit-sharing plan, in the form of one large lump-sum
  3. The lump-sum payment was due to a severance package/early retirement package

If these criteria are true for you, you should look into a fixed indexed annuity as a retirement option. An FIA comes with a number of benefits, including deferred taxes on retirement income. Contact our office to learn more about this product, and how it may be able to help your specific situation. For some retirees, an FIA is the perfect option: the “best of all worlds.”

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