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Does an Annuity Count as Income?

Stan Haithcock
December 31, 2023
Does an Annuity Count as Income?

Hi there. Stan The Annuity Man, America's annuity agent, licensed in all 50 states. I'm so glad you joined me today. Many times, when people read these blogs, they're so enamored, and they're like, "Wow. That's really informative, yet not salesy." You're right about that. That's a good point.

‌In today's blog, reading from the Will Do, Not Might Do clipboard, the topic is, "Does annuity count as income?" This was submitted by the username crazyglue33. Now, let's stop there for a second. I love crazyglue33, but if you really want your real name on the blog and you become famous in the Stan The Annuity Man world, then put your name down. We do answer these questions, but I'm going to answer crazyglue's question today.

‌I have the official Stan The Annuity Man clipboard, licensed in all 50 states, America's annuity agent, as you know, but let's read crazyglue's question. Let me be very specific, crazyglue33, because there might be a 34. Who knows? "Hi Stan, great videos." Good start, crazyglue. "I have a question I have not found an answer for anywhere about annuities." Man, you came to the right place. "If an annuity is your only source of income, does it count for purposes of accruing a Social Security benefit, or is annuity income excluded? I am considering converting a 401k to an annuity and am less than 59 1/2. Thanks!"

‌Ordinary Income Levels

‌Okay. That income you're receiving from the annuity for lifetime income is considered ordinary, not earned, and that's very important. Now, you've got to think about it from Social Security and annuities. Number one, Social Security, as I always tell people, is the best inflation annuity on the planet. Everyone who has a Social Security number in the United States as a citizen already owns an annuity, which makes me laugh because when people say, "I don't own an annuity, Stan The Annuity Man, America's annuity agent." You already own one, you annuity hypocrite, and it's a lifetime income stream. Pensions are annuities. Lifetime income streams, lifetime income annuities. So, with pensions and Social Security, you can add a lifetime income stream with an annuity, but it is taxed at ordinary income levels.

‌Let's get to some more questions from crazyglue33. Disclaimer: I'm not a tax expert. Unless it's a CPA or a tax lawyer, you should not receive any tax advice from anyone other than those two categories because those people specialize in tax advice. So, I'm giving you a 30,000-foot view of which you will take that 30,000-foot view advice, take it to your tax lawyer and CPA, validate it, and get the absolute answer from them.

‌Do Annuity Payments Affect Social Security?

‌But one of the questions I thought was a good one was, "Do annuity payments affect Social Security?" It really comes down to your specific situation and the income that you're already receiving from other sources. You just can't carte blanchely say yes or no. It really depends on your specific situation, the specific income that you are receiving, and where that income is coming from. Okay, Mr. or Mrs. crazyglue33, who submitted these questions, I really appreciate it once again.

‌The Two Questions

‌One of the closing things that crazyglue33 said was they're thinking of converting a 401k to an annuity for a lifetime income stream. That's a good thought, but we have to dig a little bit further. With me, there are only two questions that you have to ask yourself and answer. And of course, if we're going to talk, you have to book a call with me. You're going to set a time and we’re going to ask you these questions. Number one, what do you want the money to contractually do? Number two, when do you want those contractual guarantees to start? In this situation, they're thinking, "Well, I might need income, and I might need income from that 401k, turning those assets, those growth assets, accumulation assets, into decumulation lifetime income."

‌Annuity Types

‌Now the question that I would have to ask is, "When do you want that income stream to start? Do you want it to start right now?" That's fine. That's called a Single Premium Immediate Annuity. Or if you say, "You know what? I'm 59 1/2. I'm not sure I need the income right now. I might need it at age, say, 65," then we're going to quote Deferred Income Annuities, Qualified Longevity Annuity Contracts, Income Riders if it's a 401k type asset. A couple of other things that I would have to ask you is, "All right, you want income. And we'd have to determine whether it's right now or down the road, but do you have a specific dollar amount? In other words, do you want $1,000 or $2,000 or $3,000 or $2,250 a month starting now, or three years or five years or seven years?"

‌Income Goal

‌What I'm trying to get to is you need to get very detailed with what you want to do. When I say annuities, we're talking about 7+ types if you want to dig in. And by the way, you can download my annuity owner's manuals for free. But you have to come to me and say, "I need this specific amount of income," or "I'm thinking about taking this amount of the 401k and converting it into a lifetime income stream using a specific annuity type." I need you to think about not just, "I need to convert the whole thing." No. And if anyone comes to you and they say, "Let's take the whole 401k. And let's take the whole 401k and lump it into this annuity," you got to say, "Hold on there, sparky agent. Slow down."

Remember, and this is somewhat controversial; I don't know why, but I've said this in many of my blogs, and it happens to be a fact. The annuity industry frowns upon you putting more than 50% of your investible assets into annuities. Now are there some carriers that will allow more than that? Yeah. It's on a case-by-case basis. But just as a broad picture, with this question of, "I'm going to take my 401k and turn it into an annuity lifetime income stream," we need to dig in further than that. And I always like for people to use as little amount of money as humanly possible to solve for the specific lifetime income goal. I'd rather you come to me and say, "My projections, my spreadsheet, my boxes, all my projections that I'm doing on the Excel spreadsheet," or whatever you do, "I need $2,000 a month either right now or five years from now or seven years from now."

Fantastic, which leads to the next question, "How about inflation, Stan The Annuity Man?" Well, the annuities really don't perfectly solve for inflation. You can have increases to that income stream. You already own the best inflation annuity on the planet. That's Social Security. But with commercial annuities, the annuities with the companies, non-governmental, annuity companies don't give that increase away. The bottom line is that I kind of went on a rant, but I went on a rant for a reason: annuities are customizable. You and I have to talk about the specifics of what you're trying to achieve. Then, I'll shop all carriers for the best contractual guarantee for your specific situation that solves your specific goal. Then, I'll provide you with enough information to decide on your terms and timeframe.

‌Hey, thanks again, crazyglue, for the question. I know. That's a great name, crazyglue. You need to email me, crazyglue, and tell me the story behind that. But put a question on any of my YouTube videos. We will answer them unless you're just being mean. And even then, I like answering those, too. But do you remember how I mentioned the books? I have six annuity owner's manuals that you can download for free and under no obligation. No one's going to call you. No one's going to show up at your doorstep. You don't have to go to a bad chicken dinner seminar. I'm just going to give you the books. Why? I want you to be educated. Annuities are contracts. There's never an urgency to buy an annuity. The urgency is to understand them before buying. Pretty good, huh? Hey, I'll see you on the next Stan the Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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