Pay Less Tax with Annuities – Legally!
Here is our list of seven advantages you should know so annuities can help you avoid the taxman.
- Annuities provide tax deferral and do not require any reporting to any government agency while in deferral.
- Some states do not tax annuity distributions for retirees.
- Rolling 401ks and IRAs into annuities is a non-taxable event (when done properly).
- Converting IRAs and 401ks into Roth IRAs can create a lifetime of tax free income** for you and provide an opportunity for tax free dollars to be passed onto heirs.
- Annuitization creates a scenario where only a portion of each income payment is subject to taxation for your non-IRA money.
- Stretching annuity IRAs allows benefits to be passed onto beneficiaries where they can reduce the required minimum distributions and potentially some of the taxable consequence.
- Perhaps the least known tax benefit of annuities: Some carriers allow you to stretch non-qualified annuities. This can be advantageous in that you continue to safely grow the assets while continuing to benefit from the tax deferral – all while receiving smaller tax bills due to the smaller withdrawal requirements.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Here is a related article that you may enjoy.
When the owner of a nonqualified deferred annuity dies and leaves the money to a nonspouse individual beneficiary, that beneficiary has several different distribution options:
- Five-year Rule
- Nonqualified Stretch
The five-year rule requires that the entire balance of the annuity be distributed within five years of the owner’s death.
The beneficiary may:
- Take all the proceeds soon after the death of the owner
- Take discretionary amounts out at any time during the five-year period
- Wait until the fifth year to take out all the annuity proceeds
Regardless of how the beneficiary chooses to apply the five-year rule, their annuity income will be taxed to the extent of gains distributed from the contract, and gains are distributed first.
If a trust, charity or estate is the beneficiary of a nonqualified deferred annuity, the five-year rule is the only distribution option available.
Nonqualified Stretch, a.k.a. The Life Expectancy Method or One-year Rule
This is similar to the stretch or extended IRA concept, where the beneficiary uses his or her remaining life expectancy to calculate an annual required minimum distribution.
This can be characterized as a systematic withdrawal over life expectancy.
A combination of factors may make this option advantageous:
- Market exposure in variable subaccounts
- Continued tax deferral of the cash value
- Smaller income tax bills by taking only the required minimum distributions
Compared to other distribution options like the five-year rule or annuitization, these factors may create more money over time for the beneficiary. Some important points to consider are:[...Read more at wealthmanagement.com]