If you follow the rules correctly, you can make an annuity switch without the usual tax consequences.
The catch, though, is that the money has to go directly from one annuity provider to the other without ever passing through your hands.
The basic rules for annuity taxation The first question in evaluating the tax consequences of cashing in an annuity is what you mean by cashing the annuity in.
If you mean annuitizing the contract and starting to get regular payments, that's different from taking money out before you annuitize.
The trick, though, is determining exactly what is “sufficient” and figuring out how to get there. Sure, there’s Social Security, but it’s infrequently sufficient to meet all regular expenses.
A retirement plan needs to include an additional, reliable income source to make up the difference.
For this reason, annuities are sometimes described as “reverse life insurance.” And, because an annuity’s value grows over time, it also acts as a savings or investment vehicle.
Annuities are highly customizable and can vary considerably between insurance companies and even between specific annuities.
Please click on a company name to find out more about each individual carrier and the products offered.
Your input will help us help the world invest, better!
Email us at Try any of our Foolish newsletter services free for 30 days.
Annuitized payments are divided into part principal and part earnings, with taxes on the earnings but none on the principal.
If you don't annuitize, then IRS typically treats withdrawals from annuities as being from earnings first.