Managing Taxes With Annuities

With 2016 ending in a handful of weeks, we’ve officially entered into the terrain of year-end tax planning. And if your assets include annuities, then you have specific details to be aware of when managing your taxes. A variety of annuities exist in the market, and their tax rules differ greatly. So, you’ll need to ensure you address the tax liabilities associated with the specific annuities you purchased. You can start by knowing the following details as you prepare for tax season.

 1.      Making Contributions

 Annuities allow you to make contributions with no annual limits — unlike your 401(k)s or IRAs. And the compounding of your money each year is tax-deferred.[i] But, if you recently purchased either a qualified or non-qualified annuity, then you need to determine whether or not your initial contribution is tax deductible[ii]:

 •   Qualified Annuities: Investors purchase these annuities with pre-tax dollars; as a result, your original contribution to the annuity is tax deductible.

 •   Non-Qualified Annuities: Investors purchase these annuities with post-tax dollars; as a result, these original contributions are not tax deductible.

 2.      Taking Withdrawals

 Once you start taking payments from your annuities, certain tax liabilities will kick in. Here’s a few to be aware of:

 •   Ordinary Income: Remember that when you receive annuities payments from either immediate- or deferred non-qualified annuities, the IRS taxes these payments as ordinary income. In addition, they tax this income differently depending on whether you paid into the annuity with pre- or post-tax funds.

 Immediate- or Deferred Annuities: You also need to account for whether you received payments from immediate- or deferred annuities, as each annuity has

•   different tax liabilities.[i] So be sure to consult your tax advisor and financial planner on how you must manage this detail.

 1.      Managing Expenses

 You may incur expenses and fees in order to own your annuities. Unfortunately, the IRS doesn’t allow you to deduct these expenses.[ii] Remember to keep this detail in mind when managing your finances.

 Ultimately, your unique financial life will guide what strategies you need to pursue. From how you funded your annuity to which type you receive payments from, a variety of factors affect your potential tax liabilities. We’re happy to talk if you’d like to discuss how to best manage taxes with your annuities. Contact us at (518) 581-1642 today.

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Footnotes, Disclosures & Sources

1.) http://money.cnn.com/retirement/guide/annuities_basics.moneymag###/index4.htm?iid=EL/&__c9adg=3504732db375443cbbd7e2816de6291a&__c9auth=1

2.) http://www.investopedia.com/articles/personal-finance/021716/maximize-tax-benefit-your-annuity.asp

3.) http://www.investopedia.com/articles/personal-finance/021716/maximize-tax-benefit-your-annuity.asp

4.) https://www.irs.gov/publications/p17/ch28.html#en_US_2015_publink1000174152