31 August 2006
Taxation for annuities
Posted by selfprofit under: Annuity; Money; Taxation .
In the U.S. Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax deferred, that is, not subject to current income tax for annuities owned by individuals. The tax deferred status of deferred annuities has led to their common usage in the United States. Under the US tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of the contracts are bought primarily for the tax benefits rather than to get a fixed stream of income. If an annuity was used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution. If the annuity contract is purchased with after-tax dollars, then the contract holder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value according to the IRS regulations from Section 1.72-5. After the taxpayer has recovered all his basis, then 100% of the payments thereafter are subject to ordinary income tax.