Q:

What tax implications are there for retirement annuities?

A:

Quick Answer

Although earnings are calculated differently for both fixed and variable retirement annuities, they are both subject to income tax, according to The Motley Fool. Withdrawals also are subject to taxation depending on when the annuity was purchased.

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What tax implications are there for retirement annuities?
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Full Answer

An annuity is a contract agreed upon between an insurance company and a premium holder that is designed to make payments at agreed intervals, mostly after a holder retires, according to InvestorWords. Taxation on these payments occurs when a holder begins to receive distributions or makes withdrawals. All retirement annuities are tax-deferred, which means taxation is postponed until the withdrawal period. All earnings from annuities are subject to tax penalties if they're withdrawn before the holder reaches the specified retirement age of 59 1/2, states The Motley Fool.

The difference between fixed annuity and variable annuity is that a fixed annuity assures a constant specific payment, while payments from a variable annuity are dependent on the market value of the investment, states InvestorWords. The two types are similar in that they are both safe investments but have low returns.

If an annuity owner dies within the period of accumulation, the beneficiary is paid the accumulated amount, which is subject to normal income and estate taxes, explains InvestorWords.

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