Annuity Taxes

Discover The Best Way To Deal With Annuity Taxes

Annuity taxes can and indeed should play a significant role in determining which investment is right for you. It does have to be stressed, of course, that tax relief is never the most important consideration, because if you make a bad investment and receive no income at all, it will come as absolutely no consolation that you are not paying any tax. The profitability or otherwise of the investment vehicle must be the most important consideration. Only when this profitability is guaranteed, or at least highly likely, can you really afford to be worrying about taxation.

Fixed annuities are becoming more popular than ever, as more people seek to protect their wealth and investment against erosion by inflation, and against confiscatory taxation. A bank certificate of deposit, which can be a very effective short term investment, still has the problem of being taxed on annual income. This unfortunate feature has the effect of dissipating the money which would otherwise have accrued using compound interest. It is for this reason that certificates of deposit are rarely considered as suitable investments for a retirement fund.

It does have to be mentioned, though, that fixed annuities can have a sting in the tail in certain situations. If part of your aim is to pass money on to your children or other heirs, you need to think about the impact of the lack of the step up in basis rule. This can mean that a very large percentage of the money you have lovingly built up over the years using as deferred fixed annuity ends up in government hands after all. The money put into a fixed annuity is designed to be used for your retirement, so make sure that that is the primary consideration.

The alternative to this strategy, if you want to find another investment which is more friendly when it comes to avoiding inheritance taxes, is to take out a life assurance policy which operates as closely as possible to the way a fixed annuity would operate. If you know that you will only use a small percentage of your accumulated wealth during your retirement years, and that most of it will go to your heirs or beneficiaries, then this is likely to be the best way for you to go.

In summary, the best way of approaching the problem of annuity taxes depends on your main purpose in creating your savings plan in the first place. If you are intending to use the annuity for its intended purpose, which is to accumulate savings for your retirement, then you will do best by sticking with the tried and trusted system. If, on the other hand, you know that you will be leaving most of the money to your heirs, go for a life assurance solution instead, or possible a combination of both. Take the appropriate advice before you finally decide how to handle annuity taxes.

 

 

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