When Withdrawals on an Annuity are Made Prior to the Annuity Starting Date

When Withdrawals on an Annuity are Made Prior to the Annuity Starting Date

Owners of annuities often take dividends, make cash withdrawals, or take other amounts out of their annuity contracts before the annuity starting dates. Such amounts are taxable as income to the extent that the policy cash value exceeds the investment in the contract—this results in a Last In, First Out (LIFO) type of treatment where all interest/growth is taxed before any tax-free return of capital payments can occur. This interest first rule was imposed to…

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Tax-Free Buildup within Annuities is Available Only to Natural Persons, not to Corporations

Tax-Free Buildup within Annuities is Available Only to Natural Persons, not to Corporations

Tax-free buildup within the contract is allowed only to natural persons. If an annuity contract is held by a person who is not a natural person, then the annuity contract is not treated as an annuity and the income on the contract is treated as ordinary income received or accrued by the owner during that taxable year. Corporations are not natural persons. Neither is the typical trust, although a trust acting as the agent for…

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A Brief Primer on the Taxation of Annuities

A Brief Primer on the Taxation of Annuities

The taxation of annuities is governed by Internal Revenue Code section 72. Annuities grow tax deferred during the accumulation phase, although withdrawals during this phase are taxed on a Last In, First Out (LIFO) basis—meaning that withdrawals during the accumulation phase are considered to be withdrawals of growth first (fully taxable) and principal second. Payouts during the annuitization phase are split: a portion of each payment is considered principal, and a portion is deemed interest/growth….

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Joint-Life and Joint-and-Last-Survivor Annuities Explained

Joint-Life and Joint-and-Last-Survivor Annuities Explained

A joint-life annuity is a contract that provides a specified amount of income for two or more persons named in the contract. Income ends upon the first death. A joint-and-last-survivor contract is much more popular because payments continue until the last death among the covered lives. Obviously, this form of annuity is more expensive than other forms because, on average, it will pay income for a longer time. This increased cost is reflected in a…

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Annuity Benefit Payment Options: Fixed or Variable

Annuity Benefit Payment Options:  Fixed or Variable

Fixed-benefit annuities guarantee a minimum annuity benefit payment per dollar of accumulated value, similar to settlement options under life insurance policies. Variable-benefit annuities make no guarantees. Variable benefit payments depend on the market value of the assets in the separate accounts. About 90 percent of all outstanding annuity contracts fall into the fixed-rate category, but variable annuities are becoming increasingly popular (variable annuities are also fairly new compared to the long history of fixed annuities)….

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Investment Options Offered With Annuities

Investment Options Offered With Annuities

Fixed-rate annuities are similar to universal life policies in that amounts credited to cash values are based on the insurer’s current declared rate, subject to a minimum guarantee of 3 to 4.5 percent (varying by annuity contract and insurance company). Insurers may guarantee rates paid on new money (current contributions) for one to five years (or occasionally as long as ten years). The currently declared rate depends on the performance of the insurer’s general investment…

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When do Benefits Begin with Immediate and Deferred Annuities?

When do Benefits Begin with Immediate and Deferred Annuities?

An immediate annuity begins annuity payments within one year after the purchaser contributes all premiums. People commonly use immediate annuities when they wish to convert a large lump-sum amount, such as a substantial distribution from a qualified pension or profit sharing plan, the settlement proceeds of a lawsuit, or simply a sizeable amount of cash, into an immediate income stream. In contrast, deferred annuities, as the name suggests, delay or defer payments for a period…

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How and When to Get You Money Out of an Annuity

How and When to Get You Money Out of an Annuity

A life annuity with no refund feature continues annuity payouts only as long as the annuitant (or one of the annuitants) survive, with no final payment or refund at the death of the last annuitant, even if the total paid out of the annuity is less than the amount invested in the contract. This can involve a high amount of risk, as the death of a lone annuitant shortly after contract issuance could result in…

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Annuity Premium Payment Methods Explained

Annuity Premium Payment Methods Explained

Single premium annuities are often the ideal vehicles for people who have come into large cash sums. A single premium annuity will convert such amounts, for example, from an inheritance, from the sale of a business or a large piece of real estate, or from a qualified pension or profit-sharing plan lump-sum distribution, into a lifetime or certain fixed-period stream of payments. Immediate annuities are virtually always single-premium annuities (clients with subsequent investment amounts would…

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6 Major Classifications of Annuities

6 Major Classifications of Annuities

There are number of different types of annuities. Understanding them will help you make sure that you make the correct, educated decision. They can be classified according to: how premiums are paid disposition of proceeds, or what residual values—if any—are paid upon the death of the annuitant when benefit payments begin how many lives are covered what investment options are available to the owner of the annuity contract how benefits are calculated. It is important…

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