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The rules regarding annuities

Bob Priest

Dear Mr. Priest: Can I take out money from my annuity without being taxed?

– Terrance, Eagle

Dear Terrance: It depends! The current rules regarding annuities require us to take out the earnings before principal. Generally, if your annuity is non-qualified (not an IRA or qualified retirement plan), upon withdrawal the earnings are taxable but the principal is not. This presents an interesting dilemma because, if you must take out your earnings first, and they are taxable, then you will be taxed on all withdrawals until you are only left with principal in your annuity. However, it may be possible for you to invoke the “income option” within your annuity contract and save some money on taxes in the near term. The income option may allow you to take proportional amounts from principal and interest, thereby reducing taxes on withdrawals until your earnings are depleted. For example, assume your annuity is worth $75,000, of which $50,000 represents principal and $25,000 is earnings. If you simply request a withdrawal of $500 per month, you will be taxed on $6,000 per year until you are only left with principal. If you are in the 33% tax bracket, roughly one third of $6,000 ($2,000) will go to taxes and you will pocket $4,000. However, by taking distributions using your income option, roughly $4,000 comes from principal, and only $2,000 comes from earnings. This means your tax bill would be approximately one third of $2,000 (about $700) and you would pocket $5,300. Which would you rather have in your pocket $4,000 or $5,300? Happy Planning!

Bob Priest, MBA, CFP, is an independent certified financial planner and registered investment advisor serving clients locally and nationally. He can be reached at (877) BOB PRIEST or on his Web site at http://www.BobPriestFinancial.com. All opinions herein are those of the author and not of the Summit Daily News or its staff. Submit your financial questions to Bob@FinancialCompanies.com.


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