How Much Tax Do You Pay On An Annuity

So how much tax do you pay on an annuity? The types of accounts you can have annuities in are a big determinant of how the taxation is calculated to last in, first out. All this stuff that you're going to need to know, I'm going to go over it today. Remember, when it comes to taxes, always talk to your CPA and tax lawyer. So let's dive into the taxation of annuities questions right now.

What’s Your Annuity Type?

So how much tax do you pay on the annuity? It depends on the annuity type. There are two types. There are annuitized products, the lifetime income type products like Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. And then there are deferred type annuities like Multi-Year Guarantee Annuities, which is 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 an annuity also depends on the type of account the annuity is in. So, for instance, for the non-qualified non-IRA account, you will pay taxes on the interest. With an IRA, like a traditional IRA, any money coming out of that you will pay taxes on. And with a Roth IRA, it's going to be tax-free.

Only take tax advice from CPAs and tax lawyers, NOT agents.

How Are You Taking It Out?

All right. So the taxes on your annuity also depends on how you take it out. So there are a couple of ways. Annuitization is the annuitized products like Single Premium Immediate Annuities, Deferred Income Annuities, and Qualified Longevity Annuity Contracts. When that income starts, it's a combination of return of principal, plus interest. So every single payment will have the return of principal, plus interest. For example, in a non-qualified account, a non-IRA account, you're going to pay taxes on the interest. But when the account goes to zero, you’ll still get a lifetime income stream. And then all of that money, after the account's at zero, will be taxable.

Income Riders

So let's talk about income riders. Income riders, that income will be taxed last in, first out, LIFO. Gains first. So you’ll pay taxes on that income stream until you reach the principle. Once you reach the principle, then that income stream is still coming. You're not going to pay any taxes. Once the account's at zero, that income stream continues, and is taxable.

So how much taxes do you pay on an annuity? Like when you take money out of an annuity? Obviously, it depends on what type of account you're in, 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, I’ll leave you with this. Lean in, focus. Listen to me. Never take tax advice from agents and advisors. Only take tax advice from CPAs and tax lawyers, NOT agents. Talk to you next time

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