Throughout life, most of us will pay taxes in one form or another – including the biggie, income taxes. Contrary to what some people believe, though, income taxes do not disappear when you retire. In fact, in some cases, depending on how much retirement income you’re generating, you could even fall into a higher tax bracket than you were in during your working years.
Many retirees will receive income from multiple sources, such as Social Security, pension(s), and/or personal savings and investments – which may include using an annuity as an ongoing income generation tool.
If this is the case, it is important to know just how much of that annuity income you are handing over to Uncle Sam in the form of taxes. That way, you won’t have any unpleasant surprises down the road when it’s too late to plan if you find that you have an income shortfall.
Is Annuity Income Taxable?
Depending you’re your income tax bracket, Uncle Sam’s cut of your income could significantly cut into a monthly income stream, and in turn, into the retirement lifestyle that you had planned. So, just exactly how is annuity income taxed?
The answer to that actually depends on how you purchased the annuity. In this case, for instance, if you purchased an annuity in a personal investment account and you used “after-tax” dollars (i.e., money that has already been taxed when you received it), then the income you receive from that annuity will be broken down as part taxable gain, and another part return of your initial contribution (and as such, untaxed).
If, however, you used money from a traditional IRA or 401(k) plan – where your contributions initially went into the account pre-tax – then the entire amount of your annuity income will be taxed when you receive it. The amount of the tax will be based on your then-current income tax bracket.
Tax Treatment of Annuities in a Roth IRA
Over the past couple of decades, the Roth IRA has provided investors with a way to invest with after-tax funds, and to receive tax-free growth and income. So, if you use money from a Roth IRA (and/or from a Roth 401(k) plan) to purchase an annuity, your future income payments will be tax-free.
While many financial advisors don’t generally promote the purchase of an annuity using IRA funds (because the money in an IRA is already allowed to grow on a tax-advantaged basis), the truth is that we don’t know what income tax rates will be in the future. With that in mind, if your goal is to have an ongoing, guaranteed income stream that isn’t affected by income taxes, then using Roth IRA funds to buy an annuity could be a viable alternative.
Taxes and Annuities Can be Confusing…But Annuity Gator Makes It Easy
Want more information on how to ensure that your money stays safe – in light of any market condition – so that you have a good base to draw on for income, and in turn, can plan for your future income needs?
In retirement, every dollar counts. So, why risk losing money – especially if you are inching ever closer to that next phase of your life?
At Annuity Gator, we understand that planning for your financial future can be about as much fun as shopping for a used car. But because securing an income for the future is a key component of how – and how well – you will live, it makes a lot of sense to have a good understanding of the “fine print.”
That doesn’t mean that you, personally, have to become an expert, though. That’s where we come in. Our mission at Annuity Gator is to simplify the way that annuities are bought and sold so that you can live a happy, stress-free, and financially secure retirement.
This means scrapping the old way that annuities are presented to – and purchased by – consumers and making the entire process transparent.
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