Tax Deferred Annuities – Save Smart

Annuities are considered to be the best option when it comes to planning retirement income. It is a secure financial planning option. It is a contract between the insurance provider and individual that offer tax deferred annuities accumulations. It offers onetime payment or periodic payments from a specific date for a prescribed period. When annuities is owned by individual the earning are free from income taxes until an annual payout starts. This allows the income to be compounded without free of income taxes. Though, withdrawal is subject to income tax and 10% federal income tax penalty if the distribution starts earlier than 59 ½ years of age.

Annuity income a long term investment option though the money is accessible when needed either as lump sum payment or fixed monthly income. The payout is given for life. The withdrawals that exceed earnings are tax free return of principal. This way you can draw income and be deferred from taxes. Similarly by determining the amount of withdrawal the tax payment can be controlled. Since it is not annualizing the withdrawals are taxes. Lump sum withdrawal is the tax burdened as you are liable for taxes in a single year which mean you end up paying higher taxes. This means the advantage of tax deferred growth is lost. For lifetime annuity option, payments are taxed as per exclusion ratio.

On early withdrawals federal income tax of 10% is applicable though there are some relaxations that include distribution after the age of 59 ½ years, on death of the owner, in case of entity owned contract, death of primary annuitant, taxpayer becoming disabled and period payments made for life. There are other tax considerations that have to be taken into account. In case of transfer of annuity gift and income tax outcomes have to be considered. Annuities for corporation trust or annuities check out Internal Revenue Code Section 72 (u).