The Digestible IRS Series
Written by Sam Sweitzer, April 11, 2021
What is an annuity?
According to the IRS website, an annuity is a contract that requires regular payments for more than one full year. An annuity can be seen as a self-funded pension, the IRS describes their income tax treatment in the same publication as pensions. You can invest a lump sum or installments and get a guaranteed payout for the rest of your life.
What kind of payout can I expect?
You can know your payout day one of your contract if a specific guaranteed income is wanted for your plan. The fixed amount paid to you depends on the current contracts offered by the annuity companies and the amount of money used to fund it. Other annuities pay an amount that is determined by the performance of a fund. This means the payout rate is not fixed and has the opportunity to grow as the fund grows. Having the option to have performance-based payouts or a fixed guaranteed payout allows you to choose the contract that is best for your specific needs. A combination of both can be used in complete financial plan.
When is annuity income taxed?
In short, the earnings made on the annuity are not taxed until distributed through either a withdrawal or in annuity payments. The IRS further explains annuity income and how it is taxed in Publication 575, Pension and Annuity Income. This reference has been included below and can be used in discussions with your tax accountant.
The Internal Revenue Service. (2020). Annuities – A Brief Description. Retrieved from
The Internal Revenue Service. (2020). Publication 575, Pension and Annuity Income. Retrieved from https://www.irs.gov/publications/p575
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