Just one well-known benefit of a fixed annuity is that you are able to let the interest in the account compound each year with no need to pay income tax (unlike a bank account on which you pay tax whether you withdraw the interest or not). This allows your cash to increase faster when compared with taxed investment funds that pay similar before-tax returns. But making the most from the annuity withdrawals requires tax planning.
When you begin taking distributions, the proportion of income that's taxable is determined by the way you plan the distributions. Your beneficiaries, nevertheless, may not have that flexibility, and may encounter a huge tax bill on the inheritance. And when to take money from an annuity calls for tax planning.
Presuming your annuity isn't held in a tax-qualified account, like an individual retirement account, your beneficiaries may have to pay income tax on the built-up earnings when you pass away. Assume that you put $250,000 into a fixed annuity a number of years back, and today it has a value of $450,000. If you passed away, your beneficiaries would receive the $450,000, and would need to pay as much $70,000 in federal revenue taxes on the accumulated profit (maximum federal income tax rates are currently 35%). By thinking in advance, the fundamental concept of tax planning, you can place a lot of dollars in the pockets of your beneficiaries.
To assist your beneficiaries keep the cash you earned, you might want to think about purchasing a life insurance policy for the amount of the tax bill your beneficiaries will need to pay. You could pay the premiums yourself, ask your heirs to buy the policy to secure their future interests, or you could annuitize your annuity (i.e. take distributions from the annuity to make payments on the life insurance policy). In just a moment, you'll understand why converting an annuity to a life insurance coverage is always wise tax planning for those who don't require the annuity for their own living expenses.
Annuitizing your annuity will give you a constant income that you can't out-live. Per IRA rules on annuity taxation, a portion of the income will be a tax-free return of your initial investment. The balance shall be taxed as normal income. However, the $450,000 will no longer be available to go to your heirs. To replace that money, you can use the normal income that you will receive from the annuity to help pay life insurance premiums on a $450,000 policy. Once you die, your loved ones will receive the entire $450,000 from the life coverage, free of federal income taxes. Effective tax planning is just utilizing the IRS tax guidelines to maintain money in your pocket rather than send it to Washington.
Not everyone may be eligible for a life insurance policy. Depending on the payout from the annuity, your health and other elements, the payout from the annuity might not cover the full premium payment on the life insurance, even though rare.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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