Annuity Taxation

Q:

What are the tax ramifications on a 1 million dollar annuity which has accrued 250,000 dollars interest in the last 5 years, has no penalty clause( for withdrawal), and the proceeds will go to 5 heirs(children) in the form of single premium annuities-same company, which is a restricted non-profit military officer company.

A:

Just to clarify I am assuming this money in the annuity is not an IRA or tax qualified. If you take money out of the annuity; the interest must come out first, which is taxable at your current tax rate. All the interest ($250,000) must come out before you can get any of your original investment. A second option is to start a pay out on the annuity (to annuitize the annuity). This could be done over a number of years 5, 10, etc. or your life expectancy or a combination of both. If one receives payment in this form; part of each payment is return on investment and part interest, which is taxed. The Insurance Company would give you that information.

If you pass away; your beneficiaries (5 children) would have a choice between taking the money all at once or annuitize the amount over some time period or life or combination. They will be taxed on their one-fifth share at their income tax rate.

Source - dallasnews.com - 10-25-2009

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Dr. David Babbel Professor Wharton School

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