How Are Annuities Taxed [Must Watch for All Annuity Holders]

In today’s video we’re discussing how annuities are taxed. Exactly how much you pay in taxes is based on the type of annuity and how the account is set up in the beginning. So understanding the type of annuity and its tax implications BEFORE you sign on the dotted line is critical to your financial future.

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There are 2 main annuity taxation categories: qualified and non-qualified.

Qualified: A qualified annuity is funded with pre-tax dollars. This means you will pay taxes as normal income in the year you take a distribution or cash it out. It’s very similar to an IRA account.

Non-Qualified: A non-qualified annuity is an annuity that you pay for or fund with after-tax dollars.

Non-qualified annuities are taxed differently than qualified annuities because you're only taxed on the gains or the earnings since the contributions were already taxed.

So your money grows tax-deferred until you make a withdrawal – whether that be withdrawing regular payments, or a one-time withdrawal, or cashing it out.

To figure out the gains and determine how much is taxed, we use an exclusion ratio to figure out how much your payment, whether an income payment or a one-time cash payment distribution, is taxable and how much is not.

Basically, an exclusion ratio is the difference between your earnings and the amount of the principal paid.





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