Fixed Annuities Cincinnati
Taxation of Annuities
Annuities may contain a combination of pre-tax and after tax dollars depending on how they are funded. If an individual puts $10,000 of after tax dollars in an annuity and over time the annuity value grows to $20,000, the annuity now contains a combination of before tax and after tax dollars. Depending on the payout option selected, annuity beneficiaries may receive what is called an “exclusion ratio.” This ratio determines the ratio of pre-tax and after-tax dollars involved in the annuity payout.
Early Withdrawals
Annuities are intended for retirement funding, and individuals are not expected to withdraw funds from annuities before the age of 59 ½. If funds are withdrawn, there is a 10% penalty in addition to any regular income taxes that may otherwise be due on funds inside the annuity. If the annuity was purchased prior to 1982, the funds from the annuity will be taxed on a “FIFO” basis. FIFO means “first-in-first-out.” If the annuity was purchased after August 13, 1982, funds from the annuity will be taxed on a “LIFO” basis. LIFO means “last-in-first-out.”