Taking the Sting Out of Annuity Taxes

Taking the Sting Out of Annuity Taxes

Gains on variable annuities are taxed at ordinary income rates on withdrawal. But there are options to limit the bleeding.

Your client is sitting on a pile of money in a deferred annuity, and now wants to limit the income tax damage upon withdrawal. What are the options?

Based on IRS rules, an annuity policyholder owes taxes on the earnings upon withdrawal, at personal income rates (not the more generous dividend of capital gains rates) but not on the principal. Generally, the taxable earnings must be distributed first.

This means that a policyholder, who invested $100,000 in a varia

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