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Save on Annuity Taxes


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Making the right decisions regarding your annuities can save you on taxes, according to “Swapping Annuities Tax-Free” by Bill Bischoff in Smart Money.  The rising popularity of annuities since the Dow Jones largest plummet almost a year ago makes sense because they guarantee retirement income along with the potential of growth without the risk.  The tax benefit of an annuity lies in the fact that its accumulated income does not get reported on tax returns until you start receiving payments from the annuity.  Cashing out an annuity not only brings on large taxes, but could get you a penalty if you are younger than 59 1/2.  To avoid throwing your money away like that, the best bet is to transfer your annuity funds to another annuity product.

The IRS code’s Section 1035 allows for a tax-free transfer from one annuity to another as long as both are in the same name and the money goes directly to the new annuity rather than coming to the investor in cash first.  You might want to transfer to an annuity with a different company after you compare annuities and find a better one to suit your needs or one with a lower cost.  If your needs change and you want to switch between a fixed annuity and a variable annuity, a direct transfer will save you from paying taxes before you are making withdrawals.  Whatever the reason for leaving an annuity contract, transferring to an annuity that better suits your needs will save a hefty tax payment and allow you to hang on to your money longer.

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