Are Annuities Taxable?

The answer is complicated (but generally, yes they are)

Let’s assume that you have already done your research on the workings of an Annuity and you are almost convinced that it is a good investment for you and your future plans.  Now, let’s consider if the taxability of this product is what you are looking for.

First, if you purchase an annuity with pre-tax dollars, payments from the annuity are fully taxable as income. But, if you buy an annuity with after-tax funds, you are required to pay taxes only on the earnings (ie, profit).  Annuities offer tax-deferred growth, which means taxes on annuities are not due until you withdraw money from the annuity.  One of the main tax advantages of annuities is they allow investments to grow tax-free until the funds are withdrawn.  This includes dividends, interest and capital gains, all of which may be fully reinvested while they remain in the annuity.  This allows your investment to grow without being reduced by tax payments.

But this seemingly simple perk is accompanied by a raft of complicated rules about what funds are taxed, how they are taxed and when they are taxed.

Because of the complexity, it is best to consult with a tax professional when purchasing an annuity and before withdrawing any funds.

Are Annuities Taxable?

Annuities are tax deferred.  But that does not mean they are a way to avoid taxes completely.  What this means is taxes are not due until you receive income payments from your annuity.  Withdrawals and lump sum distributions from an annuity are taxed as ordinary income.  They do not receive the benefit of being taxed as capital gains.

How are Annuities Taxed?

When it comes to taxes, the most important piece of information about your annuity is whether it is held in a qualified or non-qualified account. Remember, qualified is that the taxes are behind the tax wall and are allowed by IRS to be deferred.  Non-qualified means that the taxes have already been paid. In this case, the earnings (or profits) are taxable.

Qualified Annuity Taxation

If an annuity is funded with money on which no taxes have been previously paid, then it is considered a qualified annuity.  Typically, these annuities are funded with money from 401ks or other tax-deferred retirement accounts, such as IRAs.

When you receive payments from a qualified annuity, those payments are fully taxable as income.  That is because no taxes have been paid on that money.

But annuities purchased with a Roth IRA or Roth 401k are completely tax free if certain requirements are met.

Non-Qualified Annuity Taxation

If the annuity was purchased with after-tax funds, then it is non-qualifed.  Non-qualifed annuities require tax payments on only the earnings (or profits).

The amount of taxes on non-qualifed annuities is determined by something called the exclusion ratio.  The exclusion ratio is used to determine what percentage of annuity income payments is taxable and which is not.  The idea is to determine the amount of a withdrawal or payment from an annuity is from the already-taxed principal and how much is considered taxable earnings.

The exclusion ratio involves the principal that was used to purchase the annuity, the amount of time the annuity has existed and the interest earnings.

If an annuitant lives longer than his or her actuarial life expectancy, any annuity payments received after that age are fully taxable.

That is because the exclusion ratio is calculated to spread principal withdrawals over the annuitant’s life expectancy.  Once all the principal has been accounted for, any remaining income payments or withdrawals are considered to be from earnings.

Exclusion Ratio Example

  • Your life expectancy is 10 years at retirement.
  • You have an annuity purchased for $40,000 with after-tax money.
  • Annual payments of $4,000 – 10 percent of your original investment – is non-taxable.
  • You live longer than 10 years.
  • The money you receive beyond that 10-year-life expectation will be taxed as income.

Annuity Withdrawal Taxation

How and when you withdraw funds from your annuity also affects your tax bill.

In general, if you take money out of your annuity before your turn 59 ½, you may owe a 10 percent penalty on the taxable portion of the withdrawal.

After that age, if you take your withdrawal as a lump sum, you have to pay income taxes that year on the entire taxable portion of the funds.  If money is left in your annuity account, the IRS considers the first and subsequent withdrawals to be interest and subject to taxes.

Annuity Payout Taxation

According to the General Rule for Pensions and Annuities by the Internal Revenue Service as a general rule each monthly annuity income payment from a non-qualified plan is made up of two parts.  The tax-free part is considered the return of your net cost for purchasing the annuity.  The rest is the taxable balance, or the earnings.

When you receive income payments from your annuity, as opposed to withdrawals, the idea is to evenly divide the principal amount – and its tax exclusions – out over the expected number of payments. The rest of the amount in each payment is considered earnings subject to income taxes.

Inherited Annuity Taxation

If you are the beneficiary and inherit an annuity, the same tax rules apply.  The main rule about taxation with an inherited annuity or one that is purchased is that any principal that is funded with money that was already subject to taxes will not be taxed.  Principal that was not taxed and earnings will be subject to taxation as income.  The amount of previously taxed principal included in each annuity income payment is considered excluded from federal income tax requirements.  This is known as the exclusion amount.

In Summary

If you just take the opinion of Mom, Dad, Gramma, Uncle Joe, Preacher Mike, Mr. Ramsey, Mr. Howard or even simply the Web then you are not making the best, most educated decision.  Do your due diligence and ensure that you talk to an industry professional.  What happens if Uncle Joe tells you what happened to him 30 years ago and you should “never invest in one of those annuity things”. Well, first of all what is his profession and how old was the product he purchased at that time.  Could things have changed in those years?  How about being at a family reunion and Gramma tells you that she just heard Mr. Howard talking about how some people lost money when they annuities a few years ago.  Even though you love Gramma, is she a financial professional with current experience and education.  So, in summary, annuities can be taxable in the right situation.  This is definitely something that you need to have reviewed by your Financial Professional.  Best of luck on your investment.

Why would someone choose Short Term Life Insurance?

Why would someone choose Short Term Life Insurance?

Short term life insurance might be a good fit if you have short-term goals or want financial protection for a specific amount of time. Reasons for utilizing short term life insurance might be one of the following:

  1. If you have a 20-year home mortgage, then you may want to purchase a 20-year term policy. That way, you will know that your family can pay off the mortgage and remain in their home should anything happen to you.
  2. A term policy might also be a good option if you want insurance coverage just for the years you are paying for a child’s education.
  3. Maybe you are paying off a business loan and you don’t want a spouse or partner to be burdened with the balance.
  4. Additionally, If you are a small business owner, term insurance can be used to protect against the untimely death of a key employee.

In each of these examples, the term ends along with your specific financial obligation, so you are not paying for coverage that you no longer need. For that reason, term life insurance can be a flexible and affordable coverage solution for a range of situations.

Are there Differences Among Term Insurance Policies?

The biggest differences between term insurance policies are the length of time the coverage is for. Some term policies offer optional features called riders that allow you to customize your policy. For example, you can add your children to your policy or get accidental death protection if need be.

Moreover, a term insurance policy can be increasing or decreasing.  A decreasing term life insurance policy would best be used to cover the life of a homeowner for the death benefit to cover for a mortgage.  For example, the primary breadwinner of the family and their spouse is on the deed and the mortgage.  The primary breadwinner passes and leaves the mortgage debt to the stay-at-home spouse.  In this case, the 2nd spouse would need to either go get employment to make the income to pay debts, including the mortgage, or lose the house and possibly all the assets or (worse case scenario) marry immediately so he/she can have another primary breadwinner to fill the financial void.  The decreasing term insurance death benefit can be used to pay off the mortgage and possibly all the other debts as well, leaving the stay-at-home spouse to effectively grieve and move into the next season of life without much worry or unnecessary anxiety.

Increasing term life insurance could be used in the case of having several children that might accrue education debt in future years and the parents feel as though they want to cover the cost.  In the parents’ demise, the increasing term death benefit would be able to cover the entire cost (if not a large portion of the cost) of the children’s education cost without worry or unnecessary anxiety.

At this point, it is important to note one unique type of term life insurance policy which is what is known as a return of premium term policy. With this type of policy, all premiums that have been paid are returned to the policy owner at the end of the level-premium period (terms and conditions may apply).

What Happens at the end of the Term of a Term Life Insurance Policy?

At the end of the term, you have the option of letting your coverage end, keeping it by continuing to pay the premiums, or possibly converting it to some type of a permanent life insurance policy.  We discuss various types of permanent policy options in another blog. Remember, if you do choose to convert, be sure to work with a reputable company that offers quality life insurance options.

If you choose to keep the policy after the level-premium period ends, your premiums will increase each year as outlined in your contract and usually will stop at age 85, unless otherwise indicated when the policy ends.

How Much Term Life Insurance Do I Need?

As a general rule you should purchase a term life insurance policy for 10–12 times your annual income. That way, your salary will be replaced for your family if something happens to you.

And don’t forget to get term life insurance for both spouses, even if one of you stays at home with the kids. Think about what you would pay in childcare and home upkeep costs if the stay-at-home parent was gone! No matter what, you both need term life insurance.

Want to make sure your family is covered no matter what happens? Check on your coverage BEFORE it becomes an emergency.

Most financial professionals recommend that if you decide to buy a term policy be sure it is with a term that will see you through until your kids are heading off to college and living on their own. That might be anywhere from 20 years, if you already have children, to 30 years if you do not have children or aren’t finished adding to your family yet.

A lot of life or death can happen in 20 years.

Don’t Wait Until You Need Life Insurance to Get It

The truth is, we cannot see the future and aren’t promised tomorrow. Life is precious! And the ideal time to buy life insurance is when you are young and have a clean bill of health. Especially since life insurance companies are all about weighing the risks of the person purchasing the policy.

Our strong opinion is that you should get your term life insurance policy, as much as you can afford to cover as much of your family’s needs, as possible. (In hindsight timing is everything).  Then take as many funds as you possibly can, immediately set up your emergency fund and then set a short term plan to push hard to put as much as you possibly can in a very wise (and fully proven) investment to allow your money to grow in your sleep!  That way you can begin building your nest egg.  Unless you can imagine yourself working until the day you die, then why not work now while you can in order to prepare for those later years so that you can actually enjoy the fruits of your labor.

Why Eclipse Financial Services

Eclipse Financial Services

Hi, my name is Reggie Moon.  My wife Sindy and I own a Real Estate Company on the Southside of Atlanta, Georgia.  Three years ago we added financial services to what we do for a very simple reason. Two out of one hundred people are going to buy a house this year, two! Out of those same one hundred people there are eighty five of them that are in for the biggest financial train wreck that has been seen for generations. So if you are in the business of helping people like we are, would it be better to JUST change folks address or change their financial trajectory?  I go with the latter.

Then who are going align with to help folks?    An entrepreneur that has done it maybe NEVER or one that has built not just one but two multi-billion-dollar market-cap financial services companies. We aligned with Hubert Humphrey with Hegemon Group International.    He originally built Primerica Financial Services and World Financial Group.  So if you are going to align with someone then why not go with someone who has already successfully done it.

If you do more than just change a family’s address then give me a call to discuss.  Reggie Moon, Eclipse USA Realty and Eclipse Financial Services.

Call or click 404-Eclipse(325-4773) www.404Eclipse.com

 

 

 

Master Your Money or It Will Master You!

People make several mistakes when saving and investing for retirement, and one of the biggest ones is not getting started because they think they need a large sum of money to begin, says Tony Robbins, 54, an inspirational speaker and best-selling author.

 

Some folks think investing and personal finance are so complex that they “never take the time to figure it out,” he says.  His goal with the new book is to “help the average person to cut through all the complexity and all the mythology that is sold to us about how you really can’t manage your own finances, and show them that the best people on earth have given them the guideposts and the steps to go from wherever they are financially to where they truly want to be.”

But his advice isn’t guaranteed to make you money. Even professional investors took different paths to their fortunes.

 

After researching the new book, Robbins developed what he calls the seven steps to financial freedom. Those are:

 

Step 1. Make the decision to become an investor, not a consumer. “You don’t want to own an Apple phone, you want to own Apple,” he says.

You have to commit a certain percentage of your income to savings for your financial freedom. Whatever that number is — 10%, 15% — stick to it in good times and bad. Have it taken automatically from your paycheck and put directly into a retirement or savings account.

 

Step 2. Become an insider on investing. Know the rules of the game. Understand mutual funds and learn what mutual funds beat the market or their benchmark over any 10-year period. Look into the fees you are paying on mutual funds and how that affects your financial future.

He says people also don’t read the fine print on their investments so they don’t realize what fees they are paying. Just like there is compounding growth, there are compounding costs, he says.

If you are only paying 1% in fees, you will probably end up with a lot more in your final nest egg than if you are paying 3% in fees, he says.

He points out that if you had a $100,000 investment and were lucky enough to get 7% annually, paying 1% in fees, you’d have about $574,000 after 30 years. If you paid 3% in fees, you’d only have about $324,000.

“What you don’t know will hurt you in the financial world. But once you know these things, you’ll be able to take advantage of the system instead of having the system take advantage of you.”

 

Step 3. Make the game winnable. “Most people have a number that’s so big that they never begin the journey,” Robbins says. Figure out how much money you need for financial security and financial independence. Calculate this and come up with a plan. Look for places you can save more.

 

Step 4. Evaluate your asset allocation. “You have to create a bucket list. You have to learn where to put your money to keep it safe and where to put your money to grow it with some risk,” he says. Put your money in different types of investments, such as stocks, bonds, commodities or real estate. Diversify your investments.

 

Step 5. Create a lifetime income plan. Make sure you won’t run out of income for as long as you live. “Income is all that matters. Assets won’t buy your food. They won’t let you travel. You have to focus on income. The investment community wants you to think about keeping your money in assets.”

 

Step 6. Invest like the .001%. “That means learn from the very best on earth (Schwab, Icahn, Bogle, Dalio, Forbes and others he interviewed for the book), and what you learn from them apply and you’ll achieve financial security faster than you will any other way.”

 

Step 7. Just do it, enjoy it and share it. Make a commitment to be wealthy now, not in the future. “Start where you are, and you’ll begin to find out that there’s more than enough.”

Robbins advises people to educate themselves in investing. It’s worth the time, and it’ll pay off. “You master money, or it masters you,” he says.

Based on article written by:

Nanci Hellmick

USA Today

Referencing book written by:

Anthony Robbins

Money: Master The Game