How,are,Annuities,Taxed,Normal finance, share, loan How are Annuities Taxed

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Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} Despite what some people think annuities are taxed, but they are taxed differently than other investments. Yes there are some tax advantages to annuities but there are also serious limits to these vehicles. You should be aware of what these limits are and how they work.   How the IRS Views Annuities The Internal Revenue Service views an annuity as a retirement account. Retirement accounts are tax-deferred under the US tax code which means money in one is not considered part of your taxable income. You would be able to deduct any funds you put into an annuity on your tax return. Nor would you have to report those funds on your future tax returns.   The drawback to this arrangement is that you will have to pay taxes when you take the funds out. Any money you get from an annuity payment and funds you withdraw from one are considered to be taxable income. This money will have to be reported on your tax return.   Another advantage to this deal is that investment income earned by an annuity is not taxed as long as it stays in the annuity. Interest or gains from an indexed product will not increase your taxable income as long as you leave it in the plan.   This makes an annuity an excellent investment for a person make a high income because there is no limit on the amount of funds he or she can put in one. That means somebody who has maxed out his retirement accounts can use these to keep saving.   Tax Penalties and Annuities If you are under 50 or 55 you should only put funds you are certain you will not need in the near future in an annuity. The reason for is that the IRS charges a 10% tax penalty on money taken out of most annuities by people under 59½. Any funds taken out of most annuities before that age will be subject to both the penalty and normal taxes. The only exemption to this arrangement is a Tax-Sheltered Annuity or 403B plan which is only available to certain government employees.   The Importance of a 1031 Exchange If you take funds out of an annuity or try to transfer money into one there is a way you can avoid paying federal income tax on that money. Section 1031 of the federal tax code allows you to transfer funds between retirement accounts without incurring tax penalties.   To take advantage of this arrangement or rollover the funds will have to be transferred directly between retirement accounts. If the money enters any other account such as a regular bank account the IRS will consider it taxable income. That means the funds would be subject to the 10% tax penalty for persons under age 59½. An advantage to rollovers is that they can be used to move funds from IRAs or 401k accounts into annuities.   State Taxes and Annuities If you have income tax your state you should contact your state tax agency (usually the Department of Revenue) to see how that levy affects annuities and retirement accounts. The tax code in every state is different so there could be additional state taxes on such income. Another good course of action would be to contact a tax professional with experience with your state income tax system.