Annuity Taxation- Knowing what it is

The money that you put into your investment for your retirement was not just picked up from the sidewalks. You sweated and labored to acquire it. Naturally, you would want t protect your money from the clutches of tax collectors. The good news is that most of the annuity plans allow your money to grow safe from annuity taxation. This is through the tax-deferred annuity.

This means that as long as your money or your investment remains intact in the annuity, you will not be compelled to pay taxes for any of the earning you will get from it. However, your money will not be safe from annuity taxation at all times. Annuity taxation differs from one plan to another, depending on the respective conditions set in your agreement. Many factors could affect the annuity plan, like the time or period, withdrawals and others.

When you opt for a deferred annuity, your money goes through two phases-the accumulation phase and the distribution phase. While your investment is in the accumulation phase, you will enjoy freedom from annuity taxation as your money grows and earns interest. However, during the second phase where you will begin to receive payments from your annuity, some income taxes will be due on every amount you receive. This is regardless if you get your annuity payments through a lump sum or through a series of regular payments.

For example, if you make any withdrawal of any amount from the annuity before the distribution phase begins, annuity taxation is cannot be avoided because it is not part of the payout or annuitization process yet. The annuity taxation will be based on the date you purchased your annuity. Before you purchase any annuity plan, it would do you good to consult a tax professional for a complete information regarding annuity taxation and other considerations.

There are non-qualified annuities that are taxed differently from the other investments. Some examples of which is the non-qualified variable annuity which grows without annuity taxation until you begin to make withdrawals. If your annuity is non-qualified, in the event of your death the deferred earnings of your investment passed on to your beneficiary will be considered as an ordinary income and not immune to annuity taxation.

However, if your spouse wants to continue the policy or annuity, the continued tax-deferred growth of your investment may be continued. When you make withdrawals from a non-qualified annuity, your withdrawals are subject to taxation and will be considered as an ordinary income until the account value equals the initial amount of your first investment. Another area where you will be subjected to annuity taxation is if you make withdrawals of your earnings before you reach the age of 59 and a half.