Annuities are always taxable when gain is withdrawn from the annuity unless the annuity is placed inside a Roth account.
Annuities do defer taxes when no money is removed from the annuity, so if no withdrawal, the gain is not realized until it is withdrawn from the annuity.
Annuities use the Last in Last out (LIFO) accounting rule, which means gain in the annuity must be withdrawn before basis is removed, unless the annuity is annuitized. For annuities with a cost basis (i.e. non tax deducted/qualified) annuitization uses a tax rule known as the exclusion ratio to make part of the income stream gain and part non-taxable basis.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
When are annuities taxable? Annuities are taxable during the distribution phase of ownership. While in the accumulation phase an annuity does offer protection from current tax liabilities. Taxes are deferred to the distribution phase at the normal income tax rate bracket you retirement income may fall into. Depending on how you funded your annuity, a portion or all of the distribution could be taxable income. Please note: you only pay taxes on the amounts withdrawn from an annuity during distribution phase. So taxes are due over the years rather than at one time.
Regional Marketing Director, Capital Choice Financial Group,
The taxes on an annuity are taxable when taken out because they are tax deferred. In other words, the premium deposited into an annuity is money that you do not pay taxes on before the deposit. The money for the initial premium can also be qualified money which means it could be either a traditional IRA or a Roth IRA which with the Roth there would be no taxes due when withdrawn because it is after tax money.
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Annuities do defer taxes when no money is removed from the annuity, so if no withdrawal, the gain is not realized until it is withdrawn from the annuity.
Annuities use the Last in Last out (LIFO) accounting rule, which means gain in the annuity must be withdrawn before basis is removed, unless the annuity is annuitized. For annuities with a cost basis (i.e. non tax deducted/qualified) annuitization uses a tax rule known as the exclusion ratio to make part of the income stream gain and part non-taxable basis.