Tax Deferred Strategies

What Are Taxes on Retirement Income?

Taxes on retirement income are probably something you think about a lot as you near your golden years. Especially as the economy changes. People sometimes wonder how taxes may impact their retirement. An annuity is one example of a “tax-deferred” product, that may be able to help you with this goal. Taxes are not paid immediately on any potential index interest. Instead, you only pay tax when you take money out. Because of this, some of your potential index interest may be higher than it would’ve been if it were taxable. In other words, you allow your overall policy value to increase via deferring taxes. 

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When you have an annuity, your taxation defers to the point when you take out money.

What about taxes on retirement income that comes from other sources? While we cannot provide tax advice (you’ll need to consult with a qualified tax advisor for that), we can provide you with some information regarding certain tax-deferred strategies. For example, if you receive social security benefits that look at your income to calculate the amount you get. In some situations, income from interest may cause your benefits to decrease. In fact, some people may even lose certain benefits if their income goes above a certain threshold. However, because your annuity potential index interest is not taken as income, it can potentially grow without impacting these benefits. 

Taking Money Out

A fixed index annuity (FIA) may be purchased with after-tax dollars, as well. When you participate in an annuity contract after you’ve paid tax on those dollars, you may see certain benefits. For example, in phase 1 (accumulation) your money may potentially increase without taxation. There are no taxes on the premium payments. However, in phase 2, when you begin to take your money out, that is when you would pay tax. The amount you pay is based on the amount you are taking out, not the whole amount in the annuity. Therefore, you simply pay ordinary income tax.

Fixed Index Annuities (IRAs and 401(k)s, too)

Taxes on retirement income can happen for all different types of strategies. However, fixed index annuities (FIAs) may have other benefits. For example, there are no government-set limits on how much you can put into an FIA. Of course, the insurance company does have a limit in terms of how much of your assets are allowable in an FIA. Yet, these annuities still offer more flexibility than some other places you might put your retirement savings.

You may also be able to roll over a Roth IRA into a fixed index annuity. By doing so, you might defer tax on that amount of your retirement savings. Indeed, taxes are an individualized issue, so be sure to seek advice from a qualified tax advisor before taking action. Also, if you’d like to learn more about some retirement options you may not have thought of, reach out to us at Total Financial Solutions.

Are you age 59½ or younger? This information may apply to you...

A fixed indexed annuity may also be a "rollover" option if you fall under all the following criteria:
  1. Less than age 59½
  2. 401(k) profit sharing plan paid you a lump sum
  3. This sum was part of a severance or early retirement package

In that case, you might be able to have a “Substantially Equal Periodic Payment” (SEPP) program put in place. With this program, you may be able to take money out sooner than you thought you’d be able to. Specifically, some retirees find that they do not have to pay a penalty for early withdrawal when they do this. Potentially, if conditions are right, you might be able to access your money earlier than you thought possible.

We’re here to assist you to learn ways to protect your retirement and retirement income. Reach out to us when you’re ready to learn more.

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