The Taxation of Non-Qualified Immediate Annuities
Original post by Melinda Hill Mendoza of Demand Media
An immediate annuity is an insurance policy that pays a guaranteed income for a period of time that is designated by the annuity owner. You pay a one-time lump sum premium to an insurance company, and the annuity immediately begins paying a monthly benefit. Non-qualified are annuities set up by individuals or trusts and aren't part of a formal employer retirement plan. A portion of your annuity benefits is subject to federal and state income taxes.
Immediate annuities pay out the premium you paid into the policy. The monthly payments also include interest that the balance of your annuity is earning. If the annuity was funded by non-qualified funds, you are not taxed on the premiums, but you are taxed on the interest the premium earns. Taxes are typically withheld from your annuity benefits, and the amount of taxes withheld from your monthly benefit depends on the amount of your monthly payment.
Your monthly payment is based on your age and the annuitization option you chose when you took out the annuity. Annuity options include life only, which means the payments will end at your death. This can be an advantage if you live a long time after taking out the annuity. But if you die shortly after taking out the annuity, the monthly payments end and nothing goes to your beneficiaries. You can also choose life with period certain, which means your benefits will last for a set period of time (10 years, for example) or until your death, whichever occurs last. If you die one year after starting the annuity, the remaining nine years would be paid to your beneficiary. You can opt for period certain payments or, if you're married you can opt for payments to last you and your spouse for the rest of your lives.
Immediate Annuity Options
One of the potential drawbacks to an immediate annuity is that your funds are locked into your contract. If there's an emergency, you can't withdraw a lump sum from the annuity once payments start. Some annuity contracts may allow a larger withdrawal once a year. Variable immediate annuities have payments that vary depending on the performance of the investments in which the premium is invested. Variable annuity taxes will also fluctuate. You can't withdraw a lump sum, but you can receive more income when the investments are performing well.
Purchasing an Immediate Annuity
An immediate annuity makes sense if you're likely to live several years after starting the annuity. Annuity benefits vary, so if you're considering an immediate annuity, get several quotes for comparison. All immediate annuities have the same tax treatment, so see which company offers the highest monthly benefit and the most flexibility.
- AXA Equitable: Retirement Products and Services: Immediate Annuities
- Bankrate.com; Immediate Annuities: Do-it-yourself Pensions; Jenny McCune; February 2006
About the Author
Melinda Hill Mendoza has been writing professionally for over 10 years. She worked as an editorial assistant for Forward Movement Publications in Cincinnati, Ohio. She wrote for several years for allmusic.com and edited and wrote a chapter for a book with Wooster Press. She graduated from Miami University in Ohio with a Bachelor of Arts in English.