Lump Sum vs. Annuitization: Tax Implications for Your Non-Qualified Annuity
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- Опубликовано: 1 июн 2024
- Joe is planning for retirement and wants to minimize his tax burden, especially on the interest earned from his three annuities. James explains that non-qualified annuities are purchased with post-tax money and offer tax deferral on growth until withdrawal. When taking out funds, the principal is tax-free, but earnings are taxed at ordinary income rates.
He explores strategies for tax-efficient withdrawals. He also touches on annuities, options like a 1035 exchange to transfer an annuity into a different product for improved performance, the tax implications for heirs, and early withdrawal penalties before age 59 and a half.
Questions Answered:
How are non-qualified annuities taxed upon distribution, including both lump sum and annuity options?
What strategies can be implemented to keep the tax burden as low as possible when withdrawing from non-qualified annuities?
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⏱Timestamps:⏱
0:00 - Joe’s question
1:52 - Non-qualified annuity overview
5:11 - Potential tax strategies
10:02 - Annuitization option
12:31 - Annuity regret
13:22 - 1035 Exchange
14:33 - Things to know
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James, thanks for answering this for me. We were young and dumb and trusted our advisor. We didn't realize that she was making money selling annuities. Of course, we got the ol' you'll double your money in 6-7 years. The Jackson accounts Guaranteed 6%, what they didn't tell us was the 6% was only applied to the principal each year not the entire balance. I can't wait to unload these from my portfolio.....
I'm no fan of annuities generally, but based on your comment you should look into this closer. You mentioned Jackson, 6%, and simple instead of compound interest. That makes me think you're talking about the growth of the "benefit base" of a lifetime income rider, not the value of the account. The value of the account is likely invested in "separate accounts" that are similar to mutual funds, and the entire account balance will grow (or fall) based on how those do. The key is, the "benefit base" is different. You should talk to someone like James who isn't an annuity salesperson, but knows how they work. Rather than dumping them it might make sense to incorporate them into a good plan, especially if you've had them for a few years. You've been paying for "income insurance" in a sense, and it might make sense to keep it depending on your situation. It's really going to depend on your income goals / situation. Jackson is one of the better annuity companies out there in terms of cost and what they promise, so it's not like you're in a terrible product. It may just be that you didn't need/want an annuity in the first place.
Thanks James for a very informative video!
Could you explain how an annuity works in an ira? I have 8
years left until my full retirement age. How does it affect my RMD’s over the years?
Will you do another video on non qualified 457, specifically looking at the withdrawal strategies for early retirement (lump vs 5,10,15 year distributions)? Thanks!
Thank you for this explanation.
James, Thanks for another video with good content.
Are there " general " rules for taxation if you choose to annuitize a fixed index annuity? Trying to figure tax rates long term. I have done roth conversions and am well situated for long term low tax rates including the ability to defer SS until 70 and still pay zero taxes on our SS combined income. The only possible problem is one annuity that is in a none qualified account.
If I have a basis of 330k and it now is valued at 650k, if annuitized, what would be the estimated tax hit ?
Trying to keep most of SS as not taxable.
Thanks,
RSB in NC
My strategy was to think out side the checked boxes and put solar on our house. " There is no maximum to the amount of tax credit you can claim and it can be applied to most installation costs for a solar PV system. The 30% rate will remain until 2032." this is how we got out of some taxes when we cashed in an excess amount of money. ( Electric cars are another way to use taxes not paid to leverage your other income) Keep your eyes wide open my financial friends.
The Roth question changes a bit when you consider a lifetime income rider. Once the principal is exhausted the payments are still tax free. While the tax deferral isn’t appealing of course because it’s already been taxed, this is something else to consider. Most income riders can be activated at age 50 as well, which adds another 9 years of income, and only principal (generally) at that point…
If I’m missing anything let me know!
This was very helpful. How do I know if my Principal Variable Annuity is “qualified” or not? Or are they all?
Whether it was funded with pretax or post tax dollars.
You forgot to say. Never, EVER do what that guy did.