Annuities and Taxes

Hi there, Stan The Annuity Man, America's annuity agent, licensed in all 50 states. Everyone asks, "Why do you keep saying that, Stan?" Because that's just what I do. I mean, I go home every night, look at my lovely wife Christine, of over 34 years, and say, "Hi, Stan The Annuity Man, home, licensed in all 50 states, and by the way, Christine, I am America's annuity agent." She's like, "I don't care." But you care, and that's good. You're here because we're talking about annuities, taxes, and where annuities go on tax forms. Let's dive in.

Announcing Myself

So, back to me coming home and telling my wife that I'm Stan The Annuity Man, America's Annuity Agent, licensed in all 50 states. Someone asked me the other day, "Do you wear all this logo gear at home?" Yes, but it's not as fancy. I have logo gear sweats, logo gear shorts, and logo gear socks. And my wife just said, "Can we buy something without a logo on it?" Maybe? I don't know.

No Tax Advice

First of all, let me pound the fictitious invisible table here: We do not give tax advice. We are not CPAs. We are not tax lawyers. Those are the only people who can legally provide tax advice. So, if you have an agent—I don't know why you wouldn't be using us—but let's just say your brother-in-law, sister-in-law, or sister is an agent, and they're giving tax advice, just walk away unless they're a CPA. If a CPA is also selling annuities, get up and walk out of that office too, because the CPA needs to focus on taxes and not try to make a side hustle selling annuities.

The CPA world is split—half love me for it, the other half, the ones trying to sell annuities and do taxes, hate me. However, the bottom line is that if you need tax advice, you need to see a CPA or a tax lawyer. There are a couple of situations that really make sense, and we're not even going to get into any conversation about them if you call us. One involves inherited annuities or inheritance-related issues. We'll point you immediately to a CPA and tax lawyer. No financial advisor without those two credentials should be giving that tax advice. So, take it seriously—because the IRS doesn't care if you made a tax mistake. They'll penalize you. It might make sense to spend some money to get real tax advice. Now, let's talk about annuities from a 30,000-foot view of taxes.

30,000-Foot View of Taxes

When it comes to the 30,000-foot view, no-brainer stuff, we'll talk about it today. If you want to take that plane down, see the CPA and land it with the CPA and tax lawyer. When you take money out of an annuity, let's say it's in a non-IRA setting, you'll pay taxes Last In, First Out at ordinary income levels. Now, let me backtrack a bit. You can have annuities inside IRAs, Roth IRAs, or non-qualified accounts like checking and savings. The only difference is the taxation of the money when you take it out. If it's in a Roth, you've already paid taxes, and unless our friends in D.C. change the rules, taking money out will be tax-free. If you have annuities of any type inside an IRA, when you take money out, it's taxed at ordinary income levels, just like everything coming out of the IRA because you've been deferring taxes.

But much of the confusion comes from having non-IRA assets, like non-qualified accounts (IRAs, 401(k)s, etc.). With non-IRA assets and annuities, it depends on the type. For example, CD-type annuities like Multi-Year Guarantee Annuities and Fixed Indexed Annuities are taxed differently than other annuities. When you take money out in a non-qualified setting, you're taking out gains first—Last In, First Out. That means gains first and paying taxes at ordinary income levels.

If you have an Immediate Annuity or Deferred Income Annuity (lifetime income annuitization products) using non-IRA assets, there's something called the exclusion ratio. Here's the breakdown in plain English: Lifetime income with an annuity is a combination of return of principal plus interest. In a non-IRA setting, you only pay taxes on the interest portion of that income. When you run quotes at The Annuity Man, using our calculators for Single Premium Immediate Annuity (SPIA) quotes or Deferred Income Annuity (DIA) quotes, you'll see how the principal and interest break down. Only the interest portion is taxed.

Withholding Taxes

One common question is, "Can the annuity company take out the taxes for us?" The answer is yes. During the application process, we can make that happen. And by the way, we handle everything from start to finish—we are the best team on the planet for that. Just let us know if you want the taxes withheld by the annuity company, and we can make it turnkey for you.

Deferred Annuities and 1035 Exchanges

Let's say you buy a three-year or five-year guarantee for Deferred Annuities like Index Annuities and Multi-Year Guarantee Annuities. At the end of that term, it doesn't mean you have to pay taxes on your gains. You can always do what's allowed under IRS Code 1035 (check it out if you're interested). It allows you to transfer from one annuity to another without triggering taxes. In other words, you can just keep pushing the tax puck down the ice—or, in Southern style, just kick the tax can down the road.

Annuitants Under 50

One last thing I want to mention. I don't want to get too far into the weeds, but "Talking about annuities is like having a conversation in quicksand." We can easily go down the rabbit hole. That's why CPAs and tax lawyers need to be involved. Many people call me and ask, "Why do you say people shouldn't own annuities before they're 50?" Number one, I think you should be in the markets to get real growth. You have a long life expectancy. But if you have a non-qualified Multi-Year Guarantee Annuity or Index Annuity at 45 years old and take money out before you're 59 and a half, there's a 10% IRS penalty.

I don't want to get into too many specifics, like 72(t) rules, but that's why I tell people, when you're under 50, don't really think about it. And if you're in your 50s and asking about annuities, we'll ask about your plan for taking money out. If you're under 59 and a half, there's a penalty. But if I've done anything with this video, it's to wake you up to the complexity of annuities and taxes. There are no do-overs, and that's why we work closely with CPAs and tax lawyers to ensure your decisions are on point.

Closing Thoughts

One last thing about annuities and taxes: The internet is full of people with great marketing ideas, sometimes even with "annuity tax calculators." While there's nothing wrong with that, remember, it's about the CPA and the tax lawyer in the end. Thank you for joining me today. I'll see you on the next Stan The Annuity Man blog.