The Annuity that Pays It’s Own Tax

Annuities work great while they’re accumulating.  The fixed annuity balances rise over time (variable annuities can incur losses) and most annuity owners we have met are very satisfied with their return.  But few people think about what happens at the end.  You can cash in the annuity and pay taxes on your gain or if you die with the annuity, your beneficiaries pay the income tax (and your estate potentially pays estate tax).

Let’s take an example:

You purchase an annuity for $100,000. Hypothetically, it grows to $200,000 after 10 years (hypothetical annual return 7.17%) . If you cash it in (or if your beneficiaries inherit it), there is income tax on the $100,000 gain.  Remember—this is not a capital gain which would be federally taxed at 20%.  This is ordinary income federally taxed at 28% to 39.6%.

We have observed that many annuity owners do not touch their annuities because any withdrawals would be taxable.  Therefore, many annuities pass into the owners estate and the beneficiaries are hit with the tax.

Now, there are annuities that pay their own tax for the beneficiaries.  This annuity includes a provision that if you die after owning the annuity for 5 years, the tax on the gain, calculated at 28%, will be paid by the annuity company.  This is an optional feature that has a small cost—about 2/10ths of 1% annually. (Please request an illustration for exact figures from a qualified advisor-- click here.

So if you like the idea of an annuity that pays it’s own tax bill and doesn’t leave your heirs with a bill from  the IRS, this could be beneficial for your family.