Is Annuity Income Taxable?
Diversifying your portfolio and reducing taxable income are keys to long-term financial stability. How does an annuity fit into the mix?
What is an annuity?
An annuity is a financial instrument issued by an insurance company that provides future income at regular intervals. Types of annuities vary based on growth (fixed or variable), length of the contract (fixed-term or lifetime), and when the payments begin (immediate or deferred).
Most annuity payments (including growth) are tax-deferred, meaning the annuitant is only liable for taxes on the payments received within a given year. However, a particular type of annuity—a structured settlement annuity—is 100% income tax-free for personal injury, workers’ compensation, and wrongful death settlements.
Income Tax-Free Annuities for Claimants
A structured settlement annuity offers flexible payment design, guaranteed payments, and no overhead or annual fees. Both the principal and growth are income tax-free if the money used to purchase the annuity came from a personal injury, workers’ compensation, or wrongful death case. The injured claimant must elect to utilize a structured settlement annuity before finalizing the settlement.
Income Tax-Deferred Annuities for Claimants and Plaintiff Attorneys
Outside of physical injury settlements, there is still a broad range of tax-friendly annuity options. Both attorneys and claimants can leverage tax deferral by utilizing these types of annuities:
- Structured Settlement Annuity: Flexible payment design, guaranteed payments, no overhead or annual fees; must be chosen before finalizing the settlement.
- Deferred Income Annuity (DIA): Payments starting after 12 months, guaranteed and lifetime payments, no underwriting.
- Fixed Indexed Annuity (FIA): Lump sums, lifetime or annuitization (period certain and life) with guarantee of principal and upside tied to an index (S&P 500 or similar).
- Multi-Year Guaranteed Annuity (MYGA): Fixed rate and guaranteed payments for a specific term, guarantee of principal.
Work with an Experienced Settlement Consultant
For more information about income tax-free and tax-deferred annuities, contact your Sage consultant today.