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Annuities Need Smart Tax Strategies

Posted on June 15, 2012 by bobrichards

One well-known advantage of a fixed annuity is that you are able to let the interest in the account compound each year with no need of paying income taxes. This enables your money to possibly grow faster as compared to totally taxed investments that pay similar, before-tax returns. When you start making distributions, the proportion of revenue that's taxable depends on how you structure the distributions. Your beneficiaries, however, may not have that flexibility, and might face a huge tax invoice on the inheritance. And when to take money from an annuity calls for smart tax strategies.

Presuming your annuity is not held in a tax-qualified account, such as an Individual retirement account, your heirs will have to pay income tax on the built-up income when you die. Suppose that you place $250,000 in to a fixed annuity a number of years ago, and today it's worth $450,000. In case you passed away presently, your heirs would get the $450,000, and would need to pay as much $70,000 in federal revenue taxes on the gathered profit (maximum federal income tax prices are presently 35%). Even though by thinking ahead, the fundamental definition of smart tax strategies, you can place a lot of dollars in the pockets of your heirs. Please note : a 10% federal tax penalty may apply to distributions taken prior to age 59½.

To assist your heirs keep the cash you gained, you might want to consider buying a life insurance policy for the quantity of the estimated tax bill. You could pay the premiums yourself, ask your beneficiaries to purchase the coverage to protect their future interests, or you could annuitize your annuity. In a moment, you'll see why transforming an annuity to a life insurance coverage is definitely wise smart tax strategies for those who don't require the annuity for living costs.

Annuitizing your annuity may give you a steady revenue that you cannot out-live. Part of the revenue will be a tax-free return of your initial investment. The balance will be taxed as normal income. However, the $450,000 will no longer be available to go to your heirs. To replace that money, you can use the regular revenue that you will receive from the annuity to help pay life insurance premiums on a $450,000 coverage. Once you pass away, your family members will get the whole $450,000 from the life coverage, free of federal income taxes. Effective smart tax strategies is just utilizing the tax rules to keep cash in your pocket rather than send it to Washington.

Not everyone can be eligible for a life insurance policy. Depending on the payout from the annuity, your health along with other elements, the payout from the annuity might not cover the full premium payment on the life insurance coverage, even though rare.

You Pay More Taxes Than Necessary

And we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
Get Your Copy Now - 6 Ways to Cut Retirement Taxes

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About bobrichards

Bob Richards
Editor | Involved in Various Marketing Positions within the Financial Services Industry

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