It is a fact that all investors are worried about the annual return on their investments – particularly what they will be left with after allowing for tax liabilities. If you are in the market for Certificate of Deposit (CD) or any other form of fixed income investments, it may be worthwhile to examine if there are any other options that will let you enjoy more of your earnings.
For instance, you can look into a 5-year jumbo CD. This may be an alternative as this will push your provisional income (a calculation that determines how much tax you pay on social security benefits) beyond the government's threshold. To those who may not be aware, the term 'provisions income' is what is used by IRS to determine the amount of your social security income that is taxable. The higher your provisions income, the more of your Social Security check will be taxed.
For favorable annuity tax treatment a split annuity can be a good choice. A split annuity may be described as the combination of an immediate annuity making regular annuity payments, (it may be monthly, quarterly, annually as per your preference) and a deferred annuity with a fixed maturity period. It needs to be stated that both these annuities have quite favorable annuity tax profiles as you shall see.
As regards the immediate annuity, please know that only part of the income will become taxable and the balance will be deemed a tax-free return of your investment. Once the term ends, the payments will cease. To replenish the money you invested in the immediate annuity, you would put it into a fixed deferred annuity funds that will appreciate in value over the course of the same term. As the interest earnings on the fixed annuity are, in any case, tax-deferred, they not taken into account for the government's threshold for Social Security income tax calculations. It is this special treatment of annuity tax that singles this out as an excellent alternative for retirees.
In the ultimate analysis, you will have an investment that is partially taxable and another that is tax-deferred. Thus, your provisional income should decrease as opposed to the typical fixed income investments. With appropriate planning, you can even reduce your provisional income to a point that you may not have to pay income tax on any of your Social Security benefits. Further, a decrease in your adjusted gross income will bring down the floor on deductions for medical expenses, and all other types of itemized deductions, thereby helping you make more of these deductions.
When the term of the immediate annuity ends, you could , if you choose, use the funds from the deferred fixed annuity to buy another immediate annuity (note that when properly structure, the transfer of funds from the deferred to immediate annuity is a tax free exchange). Alternatively, you could consider paying the tax due and use the balance however you like.
Of course, much of the success of this investment planning depends on your present tax bracket, itemized deductions, other exemptions, and your income needs. It is preferable that you consult a professional financial advisor to find out if this is the most favorable solution for you. Annuity tax, while required to be paid, is usually lower and thus more beneficial than the amount and type of tax generated by other alternatives.
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