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Free guide · Annuity & Retirement

How Annuities Are Taxed

A plain-English guide to withdrawals, income riders, annuitization, and Section 1035 exchanges — including how each one is taxed and how to use the rules to your advantage.

13-page PDF17 sectionsWorked examples throughout

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What it answers

Questions this guide answers

  • If I take money out of my annuity, how much of the check is taxable?
  • Why does the IRS take my earnings out first, and can I do anything about it?
  • What happens if I need the money before I turn 59½?
  • Is an income rider taxed the same way as annuitizing the contract?
  • How does the exclusion ratio work, and why does it lower my tax bill in the early years?
  • Can I move an old annuity to a better one without paying tax on the gain?
  • How can annuity income create room for a Roth conversion?
  • Which year should I choose to recognize gain, and how do I keep it off my Medicare and Social Security math?
  • I have a contract with a large gain I never want to hand my kids as a tax bill. What are my options?
  • What happens to the annuity, and the tax, when I die?
Inside the guide

Table of contents

Seventeen short sections, each with a worked example using the same contract so the numbers stay comparable from one rule to the next.

  1. 01Two Kinds of Money in Every Annuity
  2. 02Qualified vs. Non-Qualified: Which Rules Apply to You
  3. 03Withdrawals and the LIFO Rule
  4. 04The 10% Additional Tax Before Age 59½
  5. 05Income Riders (GLWBs): Withdrawals, Not Annuitization
  6. 06Annuitization and the Exclusion Ratio
  7. 07Side-by-Side: LIFO vs. Exclusion Ratio
  8. 08Section 1035 Exchanges: Moving Money Without a Tax Bill
  9. 09Strategy: Using the Exclusion Ratio During a Roth Conversion
  10. 10Strategy: Using LIFO to Pick Your Tax Year
  11. 11Strategy: Managing Medicare Premiums and Social Security Taxes
  12. 12Strategy: Converting Deferred Gains Into Spread-Out Income
  13. 12.5Deferred Gains Into Hybrid (Asset-Based) Long-Term Care
  14. 13What Happens at Death
  15. 14Things to Understand Before You Decide
  16. 15Talk to Tim at AISC

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