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Deferred Annuities
A deferred annuity is a vehicle for accumulating savings in order to eventually distributing the proceeds.
Variable Basics
Variable annuities have features of both life insurance and investment products retirement?
Taxation
The growth of the annuity value during the accumulation phase is tax-deferred
Company Default Risk
Consider the financial strength of the insurance company that writes your annuity contract.
Annuity Fees & Costs
Depending on the annuity, the advisor should expect 1% to over 10% commission on the lump sum amount.
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US Taxation of Annuities
The benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of annuity contracts are bought primarily for the tax benefits rather than to receive a fixed stream of income. If an annuity is used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution (because the taxpayer has no tax basis in any of the money in the annuity). If the annuity contract is purchased with after-tax dollars, then the contract holder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value. (This is commonly referred to as the exclusion ratio.) After the taxpayer has recovered all of his basis, then 100% of the payments thereafter are subject to ordinary income tax.
Since a change in tax laws in 2003 allowed most of the growth and dividends of mutual funds to be taxed at long term capital gains rates, the use of variable annuities as a tax shelter has greatly diminished. These changes meant that in most cases, variable annuities shouldn't be used for tax shelters unless holding for 20 to 30 years or more, depending on your situation.
Any withdrawals before an the annuitant is age 59 ½ are subject to (with exceptions) a 10% tax penalty in addition to any gain or accumulation being taxed as ordinary income. [1]
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