Tax Deferral

Taxes on retirement income is something many may not consider. Usually, one benefit of an annuity is you get to defer the taxes. For example, if you see index interest growth, you may not have to pay taxes right away. Instead, you may be able to wait until you take out your money. Therefore, some people who have index interest growth will not pay taxes until they take an income payment. Then, they may only pay taxes on the amount of money they take as income.

Taxes On Retirement Income, Including Annuities

There may be other reasons tax deferral is helpful for some retirees.

Your taxes on retirement income may include ANY income you get. For example, social security benefits. In addition, money you get from working or from any investment interest will be added to your total household income. For some people, additional interest would reduce their social security benefit amount. 

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Yet, with an annuity, you are just counting the withdrawals as income. Because of this, your potential index interest in your annuity policy should not impact your social security benefit amount. Of course, always consult with a tax advisor on matters like this.

Retirement Income & Withdrawals

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For fixed index annuities (FIAs) that you buy with post-tax money, there are potential benefits. Remember, this type of annuity has 2 phases. First, the accumulation. Then, the distribution. When in phase one, the FIA may have a tax advantage. For example, an FIA may potentially grow without tax. In other words, no taxes on premium payments. However, you would pay taxes on retirement income when you withdraw money. Yet, the tax you pay is ordinary income tax. 

Instead of tax on the full amount, you just pay tax on the amount you take. 

Of course, we recommend you consult with a tax advisor with any tax specific questions.

Other Taxes On Retirement Income Accounts

When it comes to a traditional IRA or 401(k), you may defer taxes, too. Like an FIA, these products may offer a delay in paying the taxes. But, a fixed index annuity (FIA) might have other benefits. For example, IRAs and 401(k)s have rules about how much you can put in them each year. However, and FIA does not have this limit. Indeed, each retiree may have a cap on how much the insurance company will allow you to put in the annuity. Yet, this amount may be higher than what other retirement options allow.

Ever heard the term “roll-over”? For some people, an FIA may be a way to roll-over their Roth IRA money. By doing so, your taxes may defer until you take the money as income. Then, you may have taxes on retirement income. Again, tax situations vary. So, be sure to ask a tax advisor.

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Looking to learn about how different retirement options may impact you? Contact us for an appointment.

What About Retiring Early?

An FIA may offer an interesting option for taxes on retirement income in early retirement. Importantly, this does not apply to all people retiring early. But, if you meet all the conditions below, then an FIA may offer potential tax delay option.

If all of these 3 statements are true for you, find out more about a fixed index annuity (FIA). Potentially, an FIA may help reduce the tax implications here. Why? Because if you take income too early there are penalties. Yet, there may be ways to address this. Remember, this is a very specific circumstance. Please contact our office to find out if this situation may apply to you. For some retirees, this strategy may allow early access the some of their money.

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