How much tax do you pay on an annuity? To understand all of this we must cover the types of accounts you can have annuities in, that's a big determinant of the taxes, and how the tax is calculated. Keep in mind though, when it comes to taxes, always talk to your CPA and tax lawyer. When it comes to annuities, obviously you talk to me, Stan, The Annuity Man, so let's dive into the taxation of annuities questions right now.
How much tax do you pay on the annuity? It depends on the annuity type. There's really two types. There's the annuitized products, the lifetime income type products like single premium immediate annuities, deferred income annuities, and qualified longevity annuity contracts. Then there's deferred type annuities like multi-year guarantee annuities, which are the annuity industry version of a CD, fixed indexed annuities, which is also a CD product, and variable annuities.
How much tax you pay on annuity also depends on the type of account the annuity is in. For instance, for the non-qualified, non-IRA account, you're going to pay taxes on the interest. With an IRA like a traditional IRA, any money coming out of that you're going to pay taxes on, and with a Roth IRA it's going to be tax-free. All right, so the taxes on your annuity also depends on how you take it out so there's a couple of ways.
Annuitization is the annuitized products like single premium, immediate annuities, deferred income annuities, and qualified longevity annuity contracts. Now, when that income starts it's a combination of return of principal plus interest so every single payment is going to have return of principal plus interest. For example, in a non-qualified account, non-IRA account, you're going to pay taxes on the interest but when the account goes to zero you're still going to get a lifetime income stream and then all of that money after the account is at zero will be taxable.
Now, let's talk about income riders. For Income riders, that income is going to be taxed last in first out. So you're going to pay taxes on that income stream until you reach the principal. Once you reach the principal, and that income stream is still coming, you're not going to pay any taxes. Then once the account is at zero, then that income stream continues and it's all taxable. How much taxes do you pay on an annuity, when you take money out of an annuity? Obviously, it depends on what type of account you're in but, IRA, non-IRA, et cetera, but the key thing is what tax bracket you're in.
Obviously common sense will tell you if you're in a 12% tax bracket you're going to pay less taxes on that annuity income than if you were in that high tax bracket, so just keep that in mind. All right, this is important. Never take tax advice from agents and advisors, always take tax advice from CPAs and tax lawyers.
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