Annuities have their own way of being taxed. They grow tax-free, but how they are taxed upon disbursement depends on how they were funded. Annuities can be tax deductible, but that also changes how they will be taxed once the payments become available to you.
What Determines Whether A Contribution Is Tax Deductible?
Whether contributions to an annuity are tax deductible depends on if the funds deposited were qualified or non-qualified. When an individual uses pre-tax income for contributing to an annuity, that is qualified. Non-qualified annuities are funded with after-tax income. In either case, the invested funds will grow tax-free as the savings accumulate.
When Are Annuities Tax Deductible?
Qualified annuities are tax deductible. Contributions are typically made with funds from retirement accounts such as 401(k)s. This way, you don’t pay any taxes until you withdraw funds or begin receiving payments.
When Aren’t Annuities Tax Deductible?
Any contributions using non-qualified funds aren’t going to have any tax-sparing effect during that year. However, this still poses an advantage in its own way when the time comes to receive payments.
How Do Tax Deductible Contributions Affect Payouts?
No matter how you contribute, you’ll have to pay taxes on the income you receive from annuities when you get payments. However, how it’s taxed will depend on how you contributed. If you made tax deductible contributions, your annuity payments will be taxed as ordinary income when you begin receiving them.
How Do Taxes Work For Annuities That Were Contributed To With Non-Qualified Funds?
If you made contributions with your after-tax income, your payments will be taxed differently. Instead, your taxes will be determined by the exclusion ratio, which calculates the percentage of your payments that will be taxed. The amount you receive, how much your funds have grown before being disbursed, and your life expectancy will factor into this. You’re only taxed on the growth – not the entire portion you contributed.
Annuities bought with non-qualified funds employ the last-in-first-out rule. Once you’ve received more than the amount your account has grown, you will no longer have to pay taxes because you are getting a return on principal.
Take Your Savings To The Next Level Today
At Secure Insurance Group, we will help you get the annuity that meets your needs, no matter how you fund it. We’ll help you save on costs while securing an annuity that will grow your investment tax-deferred. We will contribute our best efforts to you. Call us today at 417-883-9300, or call our toll-free line at 1-877-871-7328.