Annuities and Taxes

0:00
Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states and Puerto Rico.

0:04
Today's topic is annuities and taxes.

0:10
The IRS lives in most people's heads rent-free. My hope is that's not going to happen in

0:16
chapter 2 of your life. A lot of people get obsessed with brackets and things like that,

0:21
and Roth conversions and all that. Just go live your life, okay? Just go live your life.

0:26
We're going to talk about annuities and taxes and some details that you need to know after this.

0:37
So, annuities and taxes.

0:39
Interestingly enough, one of the main points you might want to share at the next cocktail party:

0:45
life insurance companies issue annuities. Life insurance death benefit is tax-free

0:51
to your beneficiaries. But they issue annuities, and those death benefits are not tax-free.

0:58
So, life insurance that you have to get underwritten for,

1:00
etc., has death benefits that are tax-free, probate-free, lump sum.

1:05
Annuities issued by life insurance companies are not tax-free. Those death benefits are taxable.

1:13
Now, there are many types of annuities. When you're taking annuity money out of an annuity,

1:19
regardless of the type, SPIAs, DIAs, QLACs, Income Riders, Indexed Annuities, RILAs,

1:25
Variable Annuities, MYGAs, I think those are kind of the primary eight annuity types.

1:31
That income is taxed at ordinary income levels.

1:34
Now, that's a broad brush. So let's go a little bit more in detail, product by product.

1:39
Let's do MYGAs first.

1:40
Multi-Year Guaranteed Annuities are the annuity industry's version of a CD.

1:45
The cool part about MYGAs, and by the way, all annuity types can be used in all account types:

1:53
Roth IRAs, Traditional IRAs, Non-IRA, non-qualified accounts. The only exception

1:59
is Qualified Longevity Annuity Contracts, which can only be used in Traditional IRA-type accounts.

2:05
But Multi-Year Guaranteed Annuities, once again, can be used in all account types.

2:09
It's a contractual interest rate for a specific period of time, just like a CD.

2:13
Now, with Non-IRA money, checking account-type money,

2:17
that interest grows and compounds tax-deferred. Okay?

2:22
So, if you do pull money out, it's taxed at ordinary income levels,

2:26
but literally you can kick the can down the road forever.

2:30
Someone asked me the other day, and I don't talk about myself too much,

2:33
but he said, "Stan, what do you do?"

2:35
First of all, I don't do market stuff because I came from Morgan Stanley, Dean Witter,

2:40
PaineWebber, UBS. I found the best growth stock in the country. That's my company.

2:46
But for my safe money, I do MYGAs because I don't need the income,

2:50
I don't need to pay taxes on the interest. It's non-qualified money. There's lots in it.

2:55
Lots of MYGAs for big numbers. It's just growing and compounding tax-deferred.

3:01
So, guess who gets to deal with that down the road if I never take the money out?

3:04
My daughters, my 29- and 27-year-old daughters.

3:07
And guess what? They'll be okay. They've done pretty well. They've lived under the

3:11
umbrella of capitalism that I've provided so well for these past almost 30 years.

3:17
One's 29, one's 27 at the time of this taping.

3:19
But the good news for you is you can have a guaranteed interest rate,

3:25
typically better than a CD, and it's going to grow and compound tax-deferred in Non-IRA accounts.

3:32
Obviously, you can put it in an IRA or Roth IRA, etc.

3:35
Let's talk about Roth IRAs real quick.

3:38
When it comes to annuities and taxes, if you put a lifetime income stream product in a Roth IRA,

3:44
that income stream is going to be tax-free unless they change the rules.

3:49
Same thing with Multi-Year Guaranteed Annuity interest rates.

3:52
They're going to be tax-free unless they change the rules.

3:56
So, all of these things with the Roth IRA, you know,

3:59
I personally don't have a Roth IRA. I don't trust the government

4:03
maybe like you do. I'm not against them at all. A lot of our clients do Roth IRAs.

4:06
We don't recommend them because I don't trust the government to change the rules.

4:11
I think they're going to change the rules. They're going to means-test it.

4:14
My hope for you is that you're grandfathered in and that it doesn't change.

4:17
So, any of these products inside of an IRA, Traditional IRA,

4:21
when you take the money out, it's taxed at ordinary income levels.

4:25
With a Roth IRA, it's not taxed right now unless they change the rules.

4:30
But let's focus a little bit more on the Non-IRA, non-qualified accounts, as

4:35
they say in the business. In the South, we just call it checking account money.

4:38
Okay.

4:39
What happens with these annuities and checking account money?

4:42
With immediate annuities and deferred income annuities, the lifetime income stream is a

4:47
combination of return of principal plus interest. So you're only paying taxes on the interest.

4:52
In our business, they call it the exclusion ratio.

4:55
What that means in Stanglish is that return of principal is not taxed. Interest is taxed.

5:02
So one part is excluded from taxes, the principal part.

5:07
Single Premium Immediate Annuities and Deferred Income Annuities, which are in essence Single

5:13
Premium Immediate Annuities that you defer past one year, same product, same structure, no market

5:18
attachments, no annual fees, no moving parts, just a straight pension that you can start as soon as

5:24
30 days with an immediate annuity and as far out as 40 years with a deferred income annuity.

5:30
There are some tax benefits because only the interest

5:32
portion in a non-qualified account is being taxed.

5:36
Now, income riders, which are also lifetime income products,

5:40
typically attach to either variable annuities, RILAs, or indexed annuities.

5:43
Historically, with indexed annuities,

5:46
when you attach an income rider to them, the income rider guarantee is the highest.

5:51
Just quickly draw a line down a blank sheet of paper:

5:55
Indexed annuity over here, we don't care about that bad CD product.

5:59
Income rider contractual guarantee over here, that's what we're quoting for.

6:03
That's not an annuitized product. That's what's called a drawdown product, meaning that you

6:07
can shut it on and off like a light switch, even though it's a lifetime income guarantee.

6:12
But it's coming out at ordinary income tax levels.

6:15
It's pretty interesting, though, with all of these products.

6:20
Let's go back to the immediate annuity and deferred income annuity.

6:22
Let's say you live forever and you draw the account down to zero.

6:26
The annuity company is still on the hook to pay.

6:28
At that point in time, there's no exclusion ratio. You've got

6:31
to pay taxes on the entire amount because you're now in the annuity company's pocket.

6:36
The same thing happens with income riders.

6:38
There could come a time where you draw it all down to zero

6:41
and outlive their projected life expectancy. You're in their pocket.

6:44
So all of it's taxable at that point in time.

6:47
But with income riders and a Non-IRA account, the interesting part is

6:50
there is a point in time when you're into the principal part.

6:54
You wrote a check for it, non-qualified, Non-IRA, checking account money. You had

7:00
an income rider attached to it. You drew it down and got to the principal of that indexed side.

7:05
That's not taxable because it's principal,

7:08
assuming the indexed annuity is not going to return anything.

7:11
Then when you get to zero, it's all taxable.

7:14
We'll explain all of that to you.

7:16
But there are some when it comes to annuities and taxes.

7:19
Obviously, people say, "Well, I'm just going to put everything into

7:23
an immediate annuity in a Roth IRA and it's all tax-free."

7:26
Well, okay, but you paid a lot of taxes upfront to the government to convert your IRA to a Roth IRA,

7:37
and then hopefully they don't change the rules.

7:39
You are going to pay taxes.

7:40
We can help you with how to structure things using different accounts, Non-IRA,

7:47
Traditional IRA, Roth IRA, so that you can potentially maximize taxes.

7:53
But at the end of the conversation, every single time,

7:57
we have to get your CPA or your tax lawyer involved.

8:02
Period.

8:04
No exceptions.

8:06
Agents and advisors, unless they're qualified to do so,

8:09
CFP or whatever certification they've gotten, cannot legally give tax advice.

8:15
We can come up here at 30,000 feet and tell you our recommendation,

8:19
but at the end, you have to get the checkbox and sign-off from the CPA and the tax lawyer.

8:24
I would encourage you to go to my site, theannuityman.com.

8:27
You can download my books for free. You can run quotes 24/7/365, get live MYGA feeds,

8:32
see the latest videos and live events, and all the stuff

8:36
that we do to educate and edutain everyone out there.

8:39
You can actually even email me at [email protected], and I will respond.

8:45
But do me one last favor.

8:46
Above my head, spinning clock, there's a video that I did called Why People Still Hate Annuities.

8:52
And it's a question that everyone asks, even in the industry.

8:55
Why do people still hate annuities? Why do they still hate annuities?

8:58
I saw something the other day. One of the people from CBS that just got fired

9:02
from the news department, I don't know their name. I don't know their names.

9:05
It's like, "I can't believe people think that we're biased or we have a leaning."

9:10
Hello.

9:11
I'm in the annuity business. I'm the leader out here. I'm the number one agent in the country.

9:14
I understand why people hate annuities.

9:16
I do.

9:17
That video explains it, and it's a lot of fun.

9:19
Hey, my name is Stan The Annuity Man.

9:23
See you next time.