Annuities, What Seniors Need to Know

7 Annuities and Taxes Tax planning helps to reduce and manage your taxes. A tax attorney or tax accountant should do your tax planning. Buying or cashing out an annuity may change your taxes. For example, if you sell stocks or bonds so that you can buy an annuity, you may owe extra taxes. Talk to a tax attorney or tax accountant. Getting the tax benefits of a deferred annuity: One reason people buy deferred annuities is to delay taxes. You do not have to pay taxes until you get income payments. • To get the tax benefit, you should let the deferred annuity grow as a long-term investment. • If you take out money before you reach age 59½, you pay a tax penalty (unless you become disabled or switch your money to another annuity). • The government does not set an age when you need to start taking income payments from an annuity outside of an IRA or 401(k) plan. However, your annuity contract may specify an age. • It usually does not make sense to put your annuity into an IRA, because the annuity already gives you tax deferral. Paying taxes on income: When you start to receive income payments, you have to pay taxes. Income payments are taxed as regular income, not as capital gains. Each income payment can include both principal and interest. You pay taxes on the whole income payment if you bought the annuity using pre- tax dollars. You only pay taxes on the interest if you bought the annuity using after-tax dollars. Replacing an annuity: You can move your money from one annuity to another without paying taxes. An agent may urge you to replace your annuity. Be careful. The agent gets a commission and you may pay high fees and penalties.