Tax Treatment of Annuity
1. Tax Treatment: Annuities offer tax-deferred growth, meaning the balance accumulates without immediate taxation. However, when you receive disbursements, they are subject to federal income tax at your regular tax rates.
2. Tax Rates: Disbursements from annuities are taxed at regular income tax rates, which can be higher compared to long-term capital gains rates applicable to mutual funds held for over a year.
3. Contribution Impact: Unlike traditional 401(k) contributions, contributions to annuities do not reduce taxable income.
4. Financial Planning Consideration: Experts suggest considering annuity purchases after maximizing contributions to pre-tax retirement accounts for the year to optimize tax benefits.
Annuity: Types, Legal Obligations & Tax Treatment in US
An annuity refers to a financial arrangement or contract that provides for the payment of a fixed sum of money at regular intervals (such as monthly, quarterly, or annually) over a specified period of time or for the lifetime of the recipient. Annuities are often used for retirement planning, providing a steady income stream to individuals after they retire.
This article explains the different types of annuities, the legal rules around them, and how they are taxed in the U.S. An annuity is a contract where you pay an insurance company, and they give you regular payments in the future, usually for retirement.