Annuities are retirement-investment vehicles created and maintained by life-insurance companies. Multiple types of annuities exist, each with its own set of features and benefits. Not all annuity types are appropriate for all investors or for all situations. If you own an annuity, or are considering purchasing one, it is essential that you understand the tax implications of your contributions and withdrawals.
A qualified annuity is one for which contributions have not yet been taxed. Qualified annuities are found in employer-sponsored retirement plans or IRAs. You receive an income-tax deduction for every dollar you contribute. Deposits accumulate tax-deferred until you begin making withdrawals. Taxes are due on the money you withdraw from the annuity, while the balance remaining within the account continues to grow tax-deferred.
A non-qualified annuity is one for which contributions have already been taxed. Deposits come from your own savings, and contributions do not result in an income-tax deduction. Money accumulates tax-deferred until you begin taking distributions during retirement. When you begin taking withdrawals, taxes are due only on the portions of those withdrawals that represent growth.
The Internal Revenue Service recognizes age 59 1/2 as the earliest permissible point when withdrawals from retirement accounts can be made without penalty. Regardless of whether your annuity is qualified or non-qualified, you should refrain from touching the money until you are of proper age. Once you retire and begin taking distributions, the total aggregate withdrawal amount for the year is added to your taxable income.
Since annuities are retirement-investment vehicles, and the IRS gives you tax benefits for contributing to these accounts, restrictions are placed on when withdrawals can be made without penalty. IRS regulations state that withdrawals from retirement accounts that occur prior to achieving age 59 1/2 will result in an additional tax of 10 percent of the amount withdrawn.
Required Minimum Distributions
If you have not begun taking distributions from your qualified annuity by the time you reach age 70 1/2, the IRS will force you to begin withdrawals. These withdrawals, called Required Minimum Distributions, or RMDs, are mandatory annual amounts that must be withdrawn from qualified retirement accounts. The amounts are based on your age, life expectancy and the total money within the account.
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