How Is Annuity Income Taxed?

Hey, Stan the annuity man here talking about taxes.

Disclaimer, disclaimer.

You should never ever accept tax advice from anybody other than certified tax professional,

tax lawyers, CPAs, etc, okay?

This is a serious issue.

So, you need to deal with serious people.

But with that being said, I'm going to go through the taxation of an annuity types and

how you need to make sure that you're making the right decision with account to use, what

type of annuity to use in that account.

What taxes you're going to expect to happen.

But once again, find that tax professional.

And at the end of this video, hang in there with me because I'm going to tell you how

to get my free books.

And you can also get free quotes from us as well.

So, let's talk taxes.

Alright tax-man, let's talk about it.

Let's go to the types of annuities and how they are taxed.

So, let's just take one at a time.

Single premium immediate annuities is a combination of return of principle plus interest.

Your lifetime income stream based on your life expectancy at the time you take the payment

because in a non-IRA setting, a non-qualified account is a return of principle plus interest,

you're only paying taxes on the interest part.

So, that's called an exclusion ratios.

Same thing happen to with the deferred income annuity used in a non-IRA account.

Now, if you're taking the same 2 products, the immediate annuity or deferred income annuity

in an IRA and used it inside of an IRA, then all of that income coming out is taxable.

Any money coming out in a traditional type of IRA is taxable.

If you use it in a Roth IRA, it's non-taxable, okay?

So, that's how that works.

I know this is a lot.

That's the reason I got all the books ready to send you.

And I'll tell you how to do that at the end of the video.

Now, most annuity taxation like on a deferred annuity is taxed LIFO --Last In, First Out.

It's what the accountants talk about.

And it's also used as gains first as a way to look at it.

So, let's just say you have a multi-year guarantee annuity.

And you held it for a long time.

And that's by the way, that's a fixed rate annuity.

Being in this fixed rate for a long, long time.

And you say, "I want to take some of the money out.

I want to take..."

You know you put half million dollars in and you've been getting 4% on it.

Now, you got $800,000 in there, right?

And you say, "Hey, send me the money."

So, just send me $100,000."

If it's a non-qualified account, you're going to pay taxes on the gains first, okay?

Does that make sense?

Because it's LIFO.

Last In, First Out.

Same with fixed indexed annuities.

So, a lot of it comes down to what type of account the annuity is inside of.

Now, think of the types of accounts IRAs, Roth-IRAs, non-qualified as the house.

Inside the house is the furniture.

In this case is what type of annuities are inside of that house.

And based-upon that structure is how your annuities will be taxed.

A very popular product out there...

Well, actually it's an attachment.

It's called an income rider.

An income rider is a benefit for lifetime income that you can turn on in the future

that you attach to either variable annuity or fixed-index annuity.

There's a lot different types of income rider.

Some are annuitized like an immediate annuity.

But the vast majority are what's called withdrawal type lifetime income riders, which are last

in, first out.

Gains first.

You're paying the taxes on the gains first of that.

Now, you just have to know that.

You have to know how that works.

Your advisor, hopefully me, will explain that to you.

But I recently got a call from a guy and he said, "I'm looking for a lifetime income with

non-IRA money in my checking account, Stan.

I want to make sure that in 7 years now, my wife and I have an income stream starting

that we can never outlive."

So, I'm like, "Okay.

That's what I call income later quote."

Because you're looking for income later.

And again, that income stream is based on your life expectancy primarily at the time

you take the payment.

People say that's in an interest rate-based.

No, it's life expectancy based with interest rates playing a secondary role.

So, he said, "In 7 years, I want the income."


So, what did I quote him?

I quoted a deferred income annuity because it's non-qualified and I quoted him an income


So, I went to all the carriers.

I quoted all the different income annuity carriers.

All the income riders.

And then I showed him the numbers.

Now, this is where it got interesting.

I said, "Okay, I need you to look at the deferred income annuity number.

And then I need you to look at the income rider number."

Those were the totals.

And they were really, really close.

Like within 30-40 dollars a month of lifetime income stream.

I said, "But here is the catch now."

Here's the catch: The deferred income annuity, because it's a combination of return of principle

plus interest, vast majority of that income stream will not be taxable.

So, from a time value of money, maybe that deferred income annuity makes more sent than

the income rider.

"But", I said.

"But that doesn't mean it's a pound the table reason to buy the deferred income annuity.

This is where the education --my books, the videos and us having a good conversation comes


Not just buying the sales pitch, right?

Because the income rider has it's value too.

Because it...

Even though it's tax little differently than the deferred income annuity, you have a lot

more flexibility starting and stopping control in the asset, etc.

So, what did he do at the end of the day?

Because both of them have good benefit propositions, he split the money right down in the middle.

Half of it in the deferred income annuity and the other half in an income rider.

That is not having your cake and eating it too.

What that is, is taking advantage of the benefit propositions of both of those.

But both of them are taxed differently with the income stream coming out.

But he knew that going in to the contract.

Okay, so since we're talking taxes, let's talk about life insurance because annuities

are issued by life insurance companies.

But life insurance is taxed differently than annuities.



Always tell people life insurance is the best return on investment you'll never see because

you'll be dead.

It's a great product.

I don't sell it.

I have tons on stantheannuityman.com because I live a risky life doing these videos all

the time an flying around.

But I do have life insurance.

Now, the taxation of life insurance goes lump sum probate free to you beneficiaries tax-free.

But annuities that are issued by life insurance companies, those are taxable which..

"How does that work?"

Well, annuities are guaranteed issue.

You don't have to go through any type of medical test, etc with the vast majority of 99% of

them are guaranteed issue.

So, let's just say that you bought...

You couldn't qualify for the life insurance, you could by what's called an income rider

that has a death benefit on it for you beneficiaries.

But that death benefit is going to be taxable whereas the life insurance side is not taxable.

Food for thought.

You know, as you're planning on your death, your demised legacy...

You know, those are things to keep in mind.

Now, once again, if you're talking taxes and you're really concerned about taxes on your

overall portfolio or with annuities, please see a qualified tax professional.

Do not allow an agent or advisor to be that person.

Unless the have law degree behind them, right?

Or they're CPA.

So, you know, that's very, very important.

I mean, I've been doing this for very long time.

And I know the backwards and forwards.

But I still defer to the tax lawyers.

Especially in your state.

Because they might be something.

I'm licensed in all 50 states.

I don't know about in those states.

So, hopefully, that's helped you understand kind of a 30,000 foot view of taxes and annuities.

I know I've gone pretty fast.

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