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Tax Facts About Annuities

Often touted as a tax-advantaged retirement income resource, the annuity is a complex insurance product. While it offers distinct tax benefits, it’s important to understand how it works from a tax perspective. The following are six important facts you should know:

  1. Most contributions are not tax-free; the money you initially contribute is not deductible from your tax return.
  2. The exception to this is if you hold an annuity within a traditional tax-deferred account, such as an IRA or 401(k) plan. This is known as a qualified annuity.
  3. Whether you purchase an annuity alone or within a qualified retirement plan, your earnings will grow tax-deferred until distributed.
  4. Annuities are meant for retirement or other long-term needs so they come with a surrender charge period during which you may not be able to withdraw funds without incurring a surrender charge. In addition, withdrawals taken prior to age 59 ½ may be subject to an additional 10 percent federal tax.
  5. The IRS does not impose a limit on contributions to an annuity like it does for IRAs and 401(k)s.
  6. You generally have to start taking withdrawals from your IRAs or other retirement plan accounts, including qualified annuities, when you reach age 70 ½.

 

The content provided here is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice. Contact us at info@securedretirements.com or call us at (952) 460­-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.

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