How Are Fixed Annuities Taxed?

How are Fixed Annuities taxed?

Let’s start with the most important point.

Do not take tax advice from me, an agent, an advisor, or the internet.

Talk to a CPA, tax lawyer, or qualified tax professional. Period.

Now, from a 30,000-foot view, Fixed Annuities are generally taxed at ordinary income levels when gains or income come out, unless the money is inside a Roth IRA where taxes were already paid upfront.

Key Takeaways

• Fixed Annuities can grow tax-deferred
• Gains are generally taxed as ordinary income when withdrawn
• Roth IRA annuities may provide tax-free income under current rules
• Non-IRA annuities can defer taxes until money is taken out
• Immediate Annuity payments can include both return of principal and interest
• Taxes matter, but they should not control your retirement life

Fixed Annuities Can Be Tax-Deferred

One of the benefits of Fixed Annuities is tax deferral.

If you buy a Fixed Annuity with non-IRA money, the gains can grow tax-deferred.

That means you do not pay taxes on the interest every year.

You pay taxes when the money comes out.

That’s the current rule.

How Non-IRA Fixed Annuities Are Taxed

If the annuity is outside of an IRA, that is usually called non-qualified money.

In plain English, that means non-IRA money.

With non-IRA Fixed Annuities, the earnings are generally taxed as ordinary income when withdrawn.

So if you put money into a MYGA or Fixed Index Annuity and it grows, that growth is taxable when you take it out.

How IRA Fixed Annuities Are Taxed

If the annuity is inside a traditional IRA, the money coming out is generally taxed as ordinary income.

That’s because the IRA money was tax-deferred going in.

So when it comes out, the IRS wants its piece.

No surprise there.

How Roth IRA Annuities Are Taxed

Roth IRA money is different.

With a Roth IRA, you already paid taxes upfront.

So if you buy an annuity inside a Roth IRA, income can be tax-free under current rules.

But remember, you already paid taxes to get that Roth treatment.

That’s not magic.

That’s how the structure works.

How Immediate Annuity Income Is Taxed

Immediate Annuities are a little different.

If you buy an Immediate Annuity with non-IRA money, the payment is generally made up of two parts:

• return of principal
• interest

You pay taxes on the interest portion.

If you live long enough and outlive your life expectancy, then eventually all of the payment may become taxable because the principal has already been returned.

Stop Letting the IRS Live in Your Head

Here’s the bigger point.

Do not let the IRS live in your head rent free.

Too many people build their entire retirement around trying to beat taxes.

You are not going to beat the IRS.

Do the best you can.

Work with your CPA.

Factor in the taxes.

Then go live your life.

Focus on Your Income Floor

Instead of obsessing over taxes, focus on your income floor.

That means the amount of money you need coming in every month to live the way you want.

Build the income floor.

Factor in taxes.

Then enjoy chapter two.

Where Fixed Annuities Fit

Fixed Annuities are not tax tricks.

They are contractual guarantee products.

They can provide:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

The tax treatment matters, but the main reason to own an annuity is what it contractually guarantees.

The Bottom Line

Fixed Annuities can grow tax-deferred.

When money comes out, gains or income are generally taxed at ordinary income levels unless the annuity is inside a Roth IRA.

But taxes should not be the whole strategy.

The strategy should be building the income and guarantees you need to live your life.

If you want to see what guaranteed income could look like after you factor taxes into your own plan, you can start by modeling the income side with our annuity calculators here: https://www.stantheannuityman.com/ annuity-calculator/