Maximizing your current savings to ensure you have an income that will lasts a lifetime is possible with immediate annuities. If leaving behind a financial legacy for your family is not a huge concern, then a retirement annuity is just what you'll need. This ensures an additional income for life. The lifetime annuity payments of course are based on your age and sex.
How are payment from immediate annuities taxed?
With immediate annuities, the payout is total, meaning at the end of the payout term, there is no principal left. Therefore, each payment to you contains both interest and principal. Of course, you only pay annuity tax on the interest portion not on your principal which is already been taxed. The un-taxed portion is called the exclusion ratio.
Let's use a hypothetical instance to understand how the tax on immediate annuities operates. A 65-year-old male, residing in Los Angeles, gets a total payout associated with $100,000 over a period of 15 years of $667 monthly. These types of numbers are based on a reliable provider of immediate annuities quotations.1
As per this specific estimate, the total payout over a period of 15 years at $667/month is $120,060. Which means, the exclusion ratio is astounding 83% (= $100,000/$120,060). Therefore, of each payment of $667, 83% or $553 is not taxable and only $114 is subject to tax. The net result is $7,656 to spend, after tax.
Consider the alternative investment involving $100,000 in corporate bonds of 15 years at 4% = $4,000 annual income. Taxed at 25%, that 's just $3,000 left to spend. This is less than half of what your immediate annuities offers you. However, we've got to acknowledge here that immediate annuities won't allow you anything to leave to heirs. Therefore, immediate annuities are for YOUR benefit to secure an income to make your life more comfortable.
An additional benefit -- tax savings on social security taxes?
In case of single individuals, Social Security provisional incomes of over $25,000 are taxed. While, for a couple that files their taxes jointly, the taxable provisional income limit is actually raised to $32,000. To the uninitiated, provisional income is the term used from the IRS to determine the income threshold over which social security benefits that are subject to tax. The actual provisional income includes 50% of the social security income and a tax free bond income. Provisional earnings of over $34,000 and $44,000 might lead to as much as 85% of social security benefits being taxed.
As far as immediate annuities is involved, because only a small portion of the actual income received is taxable and is not included in the provisional income, you save a whole lot more. According to the example mentioned above, your immediate annuities income adds only $1368 to the provisional income while corporate bonds ad $4,000. If your income happens to be around or within the threshold ranges mentioned above, you can secure additional tax savings from your social security income with annuities. Thanks to your immediate annuities, larger portions of your social security stay un-taxed.