Thursday, February 19, 2004
Recent client question? www.legacyannuities.com
How is an annuity taxed?
Think of an annuity as an umbrella. When money is placed under the umbrella or annuity contract, it is treated differently as far as taxes go.The money that you put in an annuity is referred to as a premium, it's your original contribution or principal contribution. Since you already have paid taxes on it, it never again will be subject to taxation. This assumes that you haven't purchased an annuity as part of a qualified retirement program such as an IRA, 401(k), TSA or 457 plan.
The money that you put into an annuity will earn interest or receive dividend income or capital gain distributions. These "earnings", unlike money in a savings account, mutual fund, certificate of deposit are not taxed in the year in which they are earned. Thus the "earnings" will continue to grow and compound tax free until withdrawn.
The IRS eventually collects taxes on the "earnings" of your annuity.
When you withdraw money from your annuity the earnings, according to the IRS, are withdrawn first. The "earnings" are subject to "ordinary income taxes" in they year in which they are withdrawn. Keep in mind that capital gain distributions in a mutual fund are taxed at capital gains rates.
The IRS also has what it calls a "Premature Distributions". If you withdraw your earnings and your under the age of 59 1/2. Not only are your earnings tax at ordinary income tax rates, the IRS makes you pay a penalty of an additional 10% on the earnings that are taxed.
Thanks,
Joe
www.legacyannuities.com
How is an annuity taxed?
Think of an annuity as an umbrella. When money is placed under the umbrella or annuity contract, it is treated differently as far as taxes go.The money that you put in an annuity is referred to as a premium, it's your original contribution or principal contribution. Since you already have paid taxes on it, it never again will be subject to taxation. This assumes that you haven't purchased an annuity as part of a qualified retirement program such as an IRA, 401(k), TSA or 457 plan.
The money that you put into an annuity will earn interest or receive dividend income or capital gain distributions. These "earnings", unlike money in a savings account, mutual fund, certificate of deposit are not taxed in the year in which they are earned. Thus the "earnings" will continue to grow and compound tax free until withdrawn.
The IRS eventually collects taxes on the "earnings" of your annuity.
When you withdraw money from your annuity the earnings, according to the IRS, are withdrawn first. The "earnings" are subject to "ordinary income taxes" in they year in which they are withdrawn. Keep in mind that capital gain distributions in a mutual fund are taxed at capital gains rates.
The IRS also has what it calls a "Premature Distributions". If you withdraw your earnings and your under the age of 59 1/2. Not only are your earnings tax at ordinary income tax rates, the IRS makes you pay a penalty of an additional 10% on the earnings that are taxed.
Thanks,
Joe
www.legacyannuities.com
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