Lump Sum vs. Annuitization: Tax Implications for Your Non-Qualified Annuity

Ready For Retirement

James Conole, CFP®

Investment Planning, Bonds, Education, Stocks, Cash, Business, Dividend Investing, Retirement Planning, Retirement, Investing, Tax Planning

5 • 706 Ratings

🗓️ 16 April 2024

⏱️ 18 minutes

🔗️ Recording | iTunes | RSS

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Summary

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 annui...

Transcript

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0:00.0	On today's episode Ready for Retirement, we're going to be diving into the world of non-qualified
0:03.6	annuities, and specifically, we're going to be talking about how non-qualified annuities are
0:08.4	taxed upon distribution. So whether you have one that you're looking to annuitize or you have
0:13.4	one that you're looking to take a lump sum from, on today's episode, we're going to help you
0:16.9	understand how that's taxed, as well as talk about strategies you can implement to keep that tax as low as possible.
0:24.5	This is another episode of Ready for Retirement. I'm your host, James Cannell, and I'm here
0:28.8	to teach you how to get the most of the life with your money. And now, on to the episode.
0:34.9	This episode is actually based upon a listener question. This question comes from Joe.
0:39.2	Joe says the following. Hi, James. My wife and I have three annuities. Two are at Jackson Life and one is at Delaware Life. The payment or the principal that we put into our Delaware Life annuity was $105,000 in 2004. It is now about $205,000. The Jackson annuities were $50,000, now worth $82,000, and a $75,000
1:00.3	contribution, now worth $118,000. All have since passed their surrender periods. My question is I plan on
1:07.5	retiring next year at age 62. I would like to defer our social security payments
1:11.6	for a while, so we won't have a lot of income. Should we take lump sum payments from these
1:15.8	annuities so it keeps our tax burden down on the interest earnings? I know I don't want to
1:20.1	annuitize them, and we've enough in other parts of our nest egg to live off of that we don't
1:24.2	need to count a monthly income from them. I'm just trying to find a way to
1:27.5	avoid taxes on the combined $174,000 of interest we've earned on these annuities. Can we cash out a little
1:34.7	at a time to stay under the $85,000 earned income limit for married finance jointly to keep within
1:40.5	the 12% bracket? Please help me understand our options from Joe.
1:45.3	Well, Joe, thank you for that question.
1:46.6	And we'll certainly help you understand the options as it pertains to these annuities.
1:50.7	To start, though, I want to give a high level overview of how these annuities work, what your
1:54.8	options are for taking income from them.
	...

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