How Much Tax Will You Pay on Income from an Annuity?
In order to determine how much of your annuity income will be taxed, it can help to take a step back and look closely at qualified and non-qualified annuities. Qualified Annuities A qualified annuity is purchased with pre-tax dollars. This refers to money that has not yet been taxed. For instance, if you own a traditional IRA account and/or you are a participant in a traditional employer-sponsored retirement plan (like a 401k), the amount of your contribution is eliminated from your taxable income in the year you make the deposit. Because of that, your taxable income for that year will be reduced – ultimately resulting in less income tax due (or a larger refund). But at some point, Uncle Sam will still want his money. So, because the money inside of the account grows tax-deferred, none of the withdrawals from a qualified annuity will have been subject to taxation. But they will be when you make a withdrawal. At that point, 100% of the withdrawal will be taxed at your then-current ordinary income tax rate. What will that rate be? Nobody knows. But looking over the past century or so, the top Federal income tax rate has been as low as just 7%, and as high as 94%. With that in mind, it is essential to try and reduce taxation in retirement in other areas.Top Federal Income Tax Rates 1913 – 2020
Year | Rate | Year | Rate |
---|---|---|---|
2018-2020 | 37 | 1950 | 84.36 |
2013-2017 | 39.6 | 1948-1949 | 82.13 |
2003-2012 | 35 | 1946-1947 | 86.45 |
2002 | 38.6 | 1944-1945 | 94 |
2001 | 39.1 | 1942-1943 | 88 |
1993-2000 | 39.6 | 1941 | 81 |
1991-1992 | 31 | 1940 | 81.1 |
1988-1990 | 28 | 1936-1939 | 79 |
1987 | 38.5 | 1932-1935 | 63 |
1982-1986 | 50 | 1930-1931 | 25 |
1981 | 69.125 | 1929 | 24 |
1971-1980 | 70 | 1925-1928 | 25 |
1970 | 71.75 | 1924 | 46 |
1969 | 77 | 1923 | 43.5 |
1968 | 75.25 | 1922 | 58 |
1965-1967 | 70 | 1919-1921 | 73 |
1964 | 77 | 1918 | 77 |
1954-1963 | 91 | 1917 | 67 |
1952-1953 | 92 | 1916 | 15 |
1951 | 91 | 1913-1915 | 7 |
Source: Inside Gov (http://federal-tax-rates.insidegov.com/)
Non-qualified Annuities With a non-qualified annuity, the contributions have already been taxed. Similar to with a qualified annuity, though, the growth that takes place in the account is tax-deferred. Therefore, upon withdrawal, the portion of the income that is considered a return of your contribution is non-taxable, while the portion that is considered gain will be taxable. The IRS determines how much of each non-qualified annuity payment is gain, and how much is a return of your contribution, through a formula that is known as the exclusion ratio. There are several factors considered when coming up with the exclusion ratio. These include the principal and earnings, the length of the payout period, and the annuitant’s (i.e., the income recipient’s) life expectancy if the annuity is making a lifetime income payout.