20 Oct Can I avoid taxes on my annuity payouts?

Q. I have a fully mature fixed index annuity within my IRA. Can I turn on the income stream but have the monthly money stay in the IRA and thus avoid the taxes?
— Investor

A. There are many different types of annuities, from fixed annuities, to indexed annuities, to variable annuities and more.

Each life insurance company that offers an annuity has their own product with different features, benefits, risks and costs.

That means you should contact your annuity’s issuing life insurance company to ask these questions directly to them, including how certain transactions may affect your annuity and its various riders and benefits.

But let’s address your question in general.

In essence, an annuity is a contractual agreement in which payments) are made to an insurance company, which agrees to pay out an income or a lump sum amount at a later date, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

Typically, he said, variable annuities have mortality and expense charges, account fees, investment management fees and administration fees.

“In addition, annuity contracts have exclusions and limitations, early withdrawals may be subject to surrender charges and, if taken prior to age 59 1/2, a 10% federal income tax penalty,” Cocco said. “Deferred variable annuities are long-term financial products offered by prospectus and designed for retirement purposes, and they are subject to investment risks, including possible loss of principal invested.”

A fixed index annuity is an annuity where you can earn interest credits each year dependent on the returns of various indices, such as the S&P 500 or Russell 2000, and usually has a 100% guarantee of principal based on the claims-paying ability of the annuity’s issuing life insurance company, Cocco said.

Additionally, it sounds like your annuity may have a guaranteed income rider, which may give you the ability to take an income stream for the rest of your life, Cocco said.

You mentioned how your annuity is “fully matured.” Do you mean that this is out of the surrender charge period, and therefore, there are no more penalties for withdrawals? Or is it fully mature, meaning you must start an income stream?

“If it is the former, and you don’t need withdrawals, you’ll want to consider working with your agent or other qualified financial professional to determine whether turning on the income stream, leaving the money invested, or exploring another type of IRA account may be suitable, appropriate and advantageous for you,” he said.

But if you feel like you must, or want to start the income from the annuity, your insurance company may allow you to have that income sent out to another IRA account as a “trustee to trustee transfer,” then continuing to defer the taxes on the IRA because you are not actually withdrawing the money, and instead rolling it over to another IRA, Cocco said.

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This story was originally published on Oct. 20, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.