Tax Advantages

Money invested and allowed to accumulate in an annuity for several years grows without the need to pay taxes until you begin receiving payments. This is called tax deferment. Death and disability are the only reasons the IRS allows you to withdraw any money from your annuity before age 59 ½ without incurring a tax penalty of 10% of the value of your annuity. For older investors, this does not present any problems.

Once you annuitize, your gains are taxed at your normal tax rate. Any beneficiary receiving payments after your death will also be taxed at their normal income tax rate.

What is the Best Time in Life to Purchase an Annuity?

Annuities are available for purchase at any age if you are willing to make a long-term commitment in your investment to avoid tax penalties for early withdrawal. Investing in annuities at age 55 or older puts you closer to the critical age of 59 1/2. You are less likely to need cash from your annuity investment and, therefore, also less likely to pay a tax penalty for early withdrawal.

If you will not need to make a cash withdrawal from your annuity, you can purchase an immediate annuity which skips the accumulation phase altogether. Just transfer some money from another investment or your checking account to the insurance company and begin receiving annuity payments immediately.

Can My Annuity Be Cancelled?

You can surrender an annuity contract which is still in the accumulation phase at any time. Your insurance company may charge you a fee for this service if you surrender in the first several years of your contract. The surrender fee varies according to the length of time you have owned your contract.

Another option to consider is a tax-free exchange of your current annuity for a new contract. This is called a 1035 exchange. You can exchange a life insurance policy or annuity for another annuity without incurring any tax obligations. Check with a tax professional for advice on the consequences of a 1035 exchange.

If you become sick or disabled and must have access to your annuity funds quickly, some companies will let you withdraw a small portion of your annuity without the need to surrender the contract. Just remember that if you are below age 59 ½, you will have to pay the 10% tax penalty.

Before You Buy That Annuity…

• Gather your investments and calculate how much money you have in other tax-deferred retirement or investment accounts.

• Estimate how long you expect to live if you remain healthy.

• Read all of the investment brochures and educate yourself on which type of annuity is the best one for your needs.

• Decide the length of time you will allow your money to accumulate before you begin withdrawing funds.

• Research the company providing your annuity. Are they stable financially? Funds are protected by state guarantee funds in the event your company becomes insolvent. Choosing a stable company may help you avoid financial risks altogether.