Tuesday, November 14, 2017

Something more on annuities! How are they really taxed?

Whether you have to pay taxes on an annuity death benefit will depend on what the death benefit is and the type of annuity originally purchased.

First, it depends on if you’re dealing with a qualified or non-qualified annuity.

Qualified Annuity

In a qualified annuity, the owner originally was able to put the money away on a pre-tax basis, so taxes will be due as soon as money is withdrawn at an ordinary income rate.

Non-Qualified Annuity

In the case of a non-qualified annuity (one purchased with after-tax dollars), the beneficiary might not have to pay tax, depending on the type of death benefit. Some death benefits to beneficiaries are refunds of premium payment, rather than true death benefits.
In a refund case, the beneficiary gets back the remaining amount that represents the premium paid but not recouped by the original annuitant in the form of an income payment or withdrawal.
Hypothetically, if someone had a non-qualified annuity purchased with a $100,000 premium and received $50,000 worth of payments before passing away, his or her beneficiary would get the remaining $50,000. In this case, the beneficiary would not have to pay taxes on the death benefit because the death benefit would be considered a return of premium. This example is for illustrative purposes only and does not reflect how product fees, expenses or withdrawals would impact these figures.
In a true death benefit, however, the beneficiary might actually accumulate interest above and beyond the premium amount. Any annuity growth, which include amounts outside of premiums paid by the original owner, will be taxed as ordinary income.
This also depends on how you receive the annuity death benefit. If you take it out in cash, then the annuity gains will be considered taxable as regular income. But if you’re inheriting a qualified annuity (one in an IRA or 401(k)) from your spouse, then you would be permitted to roll that qualified annuity into a qualified account tax-free. Non-spousal beneficiaries can do this as well, but in that case, the annuity would need to be rolled into an inherited IRA, which would be a special account set up in the decedent's name to benefit you. In the case of a rollover, you’ll pay tax on any withdrawals made, rather than the whole amount.   
  
Trust as a Beneficiary
This topic will be the subject of our next blog on annuities we will go into detail regarding the problem with naming a trust as the beneficiary.


At John L Mottram CPA LLC Certified Public Accountants we have the insights you need to establish the right time of annuity to minimize taxes. Contact John L Mottram directly at jlm@mottramcpas.com or on 214-543-1855. Also go to our website at www.mottramcpas.com to sign up for our regular tax updates.

No comments:

Post a Comment