Tax-Deferred Growth In A Fixed Income Annuity
A common concern many people have regarding fixed income annuities is in regards to their tax treatment. The concept behind fixed income annuities is actually quite simple. A fixed annuity is simply an insurance product which pays out a fixed income over a specified period of time. This payment is determined at the time of the contract and typically does not vary.
One of the most beneficial aspects of the fixed income annuity is the fact that you may receive payments out of the annuity for the span of the contract or the lifetime of the annuitant. These life annuities can provide a guaranteed income throughout the whole duration of your retirement.
The basic tax treatment of fixed income annuities can be considered relatively simple, whereas as with most other tax questions, the details can get rather complicated. Most annuities enjoy tax-deferred growth, and are only taxable upon distribution.
Tax-deferred growth means that any growth inside of the annuity account is not taxable until it is distributed to the beneficiary. This growth can provide very significant gains to the overall account value.
Each annuity distribution is split into two sections, a taxable section and a nontaxable section. The portion of the benefit that is taxable is dependent upon the exclusion ratio for the annuity. This ratio is calculated by dividing the amount invested in the annuity by the total amount expected to be received. This ratio is then multiplied by each anticipated distribution to calculate the taxable and non-taxable portions of the distribution.
Generally speaking, the taxable portion of the account refers to the portion of the account that has never been taxed, or the growth and payments beyond the premium payments. The nontaxable portion of the annuity is typically the sum of the premiums paid.
Fixed period annuities are normally much easier to calculate the taxes on than are life annuities. The life annuity contracts must use a special table by the U.S. Treasury to determine the life expectancy of the annuitant.
Though there are certainly disadvantages to fixed income annuities, the fixed annuity can be a very valuable resource for retirement planning and preservation of your hard-earned capital. The lifetime income guarantee that many annuities provide can give the investor a level of security, confidence, and low-risk growth that other vehicles cannot provide. Couple this safety with the tax-deferred treatment of fixed annuities and this insurance product can become a very effective financial planning tool.
Be sure to check out Brian Atkinson at The Fixed Annuity Guide to learn more financial planning topics. The fixed income annuity can be used in creative and powerful ways.
