Deferred Annuities Income Tax
Annuities are specially designed investment products for investors who want to make their future secure by ensuring a regular income in the post-retirement period. The premium is required to be paid either in lump sum or in installments for a stipulated period of time to yield returns after retirement. Thus, annuities function like retirement saving accounts. |
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Typically, the amount earned on them is deferred from income tax until their distribution. Such a tax-deferred annuity is usually sponsored by employers, but may also be offered to the investor as a part of a supplemental plan. In any case, these products are subject to strict IRS regulations.
The income tax on deferred annuities is largely dependent on the structure of contribution. While the employer-backed annuity contributions comprise mainly of pre-tax money, the supplemental retirement plans involve after-tax money contributions. Thus, in the former case, 100 percent distribution gets added to the ordinary income of the investor, while in the latter case, only the earnings get added to it. Besides, an extra 10 percent tax penalty is levied on a non-qualified distribution or an early withdrawal made before the age of 59.5 years.
Employer-funded deferred annuities are the most preferred ones nowadays and are also sometimes called the ‘403(b) tax-sheltered annuities (TSAs)’. These sponsored retirement plans can be funded only by government organizations, tax-exempt institutions, public schools, and city utilities. The deferrals are elected by the employee (investor) by means of fixed reductions from his monthly salary. Also, under the plan, the employee automatically becomes entitled to the non-elective contributions of the employer. He may continue the deferred annuity plan even after the termination of his employment.
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