How Split Annuity Interest is Beneficially Taxed

It is a fact that most investors are worried about the yearly return on their investments, particularly what they will be using after allowing for tax liabilities. In case you are in the market for a CD or any other form of fixed income investments, it can be worthwhile to examine if you will find any other options that will permit you to enjoy more of your earnings after taxes are accounted for. In a moment, we will illustrate the benefits of how the annuity interest from split annuities are beneficially taxed so that you have more to spend.

For example, you can look into a 5-year jumbo CD. There are two disadvantages with how these are taxed:

1. you pay tax on interest each year even if you don't withdraw it
2. 100% of the income is included in your "provisional income" which affects how much of your social security income is taxed.

In fact, for a beneficial annuity interest tax treatment, a split annuity is usually a good choice. A split annuity could possibly be described as the combination of an immediate annuity generating annuity payments, (it may be monthly, every quarter, annually as per your preference) and a new deferred annuity. Both annuities would be for the same term, in our illustration, let's say 8 years. It has to be stated that these two annuities have quite favorable annuity interest taxation profile as you will see.

As regards the immediate annuity, please realize that only part of the income is taxable and another portion is tax free. Once the 8-year period of time ends, the payments from the immediate will stop and there is no principal remaining. To substitute the money that gets dissipated by the immediate annuity interest payments, you would also invest into an eight-year fixed deferred annuity that will appreciate in value in the course of 8 years. Because the interest earnings on the fixed annuity are, regardless, tax-deferred, they not taken into account for your government's threshold for Social Security income taxation.

As a hypothetical example, let's assume that you can get annuity interest of 5% on a split annuity. Let's also assume that you could get the same rate at the bank for a CD. We'll appropriately split the same $100,000 investment and attribute a 5.0% rate for the immediate annuity, and 5.0% for the deferred annuity premiums. The table shows you the hypothetical investment split and annuity interest results for a term of 8 years.

Even for annuity interest rates comparable to the CD, the immediate annuity leaves you with a yearly after tax annuity income of $4,713 compared to the $3,600 of the CD – almost 31% more income. Note that no fees or expenses were incorporated into the annuity values illustrated as typically, in the case of fixed annuities, the stated interest rate is net of commissions and fees. However, if additional expenses or costs were present, they would reduce performance.

Inside the ultimate analysis, you will have a good investment that has partially taxable annuity interest and one more that is tax-deferred. Thus, your provisional income ought to decrease potentially reducing the tax you pay on social security benefits. With appropriate preparing, you can even reduce your provisional income to a point that you could not have to pay income tax on any Social Security benefits. Additional, a decrease in your modified gross income will bring down the ground on deductions for health care expenses, and all other types of itemized breaks.