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Old 12-09-2014, 12:04 AM
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ANNUITY/ insurance taxed how?

My mother had a fixed annuity she never started drawing on. She initially paid $25k for it decades ago. I was the beneficiary and it has a cash out value of $125k. The guy who sold it to her said the $100k will be long term capital gains. The insurance company sent me a letter with my first elected payment saying that the payout above the purchase price will be ordinary income. This has a huge impact on how I take the payout since I am in the 15% bracket so my understanding is LTCG are not taxed as long as I stay in that bracket. I can also take it over a 5 Year timeframe and keep earning 4%. Can I pay taxes on this as LTCG??



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Old 12-10-2014, 05:13 PM
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My mother had a fixed annuity she never started drawing on. She initially paid $25k for it decades ago. I was the beneficiary and it has a cash out value of $125k. The guy who sold it to her said the $100k will be long term capital gains. The insurance company sent me a letter with my first elected payment saying that the payout above the purchase price will be ordinary income. This has a huge impact on how I take the payout since I am in the 15% bracket so my understanding is LTCG are not taxed as long as I stay in that bracket.======>>>>>>>.correct your ltcg tax rate is 0% aslongas your tax bracket is 15% or lower.

I can also take it over a 5 Year timeframe and keep earning 4%. Can I pay taxes on this as LTCG??======>>>no; as you cash out a deferred annuity in a lump sum, then you'll have to pay income taxes on all of the earnings higher than your original investment. If you take several smaller withdrawals from the account, however, then the IRS considers your first withdrawals to come entirely from interest and earnings. That means you'll be taxed on all of your withdrawals until you take out all of the interest and earnings. Only after that can the principal be withdrawn without taxes. Say, for example, that you invest $25kin a deferred annuity and the investments increase in value by $125k, making the account worth $125k. The first $100k you withdraw is considered to be taxable earnings, so you'll pay taxes on all of the withdrawals up to that level before you can withdraw the original $25k investment without taxes.


So aslongas you withdraw the money from your annuity in one lump sum, you'll have to pay taxes on the $100k in profit that your annuity earned. since you're in the 15 percent income tax bracket, you'll have to pay $15k on that $100k. The federal government considers gains from annuities to be an example of ordinary income. so you'll pay income taxes on any earnings when you cash out an annuity. This is significant because you won't be able to take advantage of the capital gains tax break, which taxes long-term investment gains at 15 percent. Instead, you'll have to pay taxes on your annuity gain that matches your normal tax bracket, even if that bracket is higher than 15 percent. You can avoid paying taxes when cashing out an annuity under one condition: if you transfer your money immediately into another annuity. You do this through what is known as a 1035 exchange.



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