The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies

URL:  http://boards.fool.com/if-you-look-closer-at-the-quoted-material-is-30275170.aspx

Subject:  Re: Term Certain Annuitization - Inherited Annui Date:  9/21/2012  10:15 AM
Author:  Wradical Number:  116650 of 123001

If you look closer at the quoted material is correct as it pertains to
"amounts received as loans or amounts received on surrenders "

http://www.annuityadvisors.com/FAQ/General.aspx

"Taxation of Annuity Withdrawals and Distributions."

"For annuities purchased before August 14, 1982, the general rule regarding cash withdrawals, amounts received as loans or amounts received on surrenders is that they are tax free until they equal the contract owner’s basis or investment in the contract. After that, they are fully taxable as income. These annuities are given “first-in, first-out” (FIFO) treatment.

Annuities purchased on or after August 14, 1982, the general rule regarding these same kinds of distributions is that they will be treated first as fully taxable interest payments and only second as a recovery of non-taxable basis. These annuities are given “last-in, first-out” (LIFO) treatment."


However, these only pertain to the transactions described, for tax-deferred annuities, and not a "pure, actual" stream of payments, which is what annuities were origianlly designed to be, and what I understand the OPs questions are about. These are described in the first paragraph,

Taxation of Annuity Income
Income received from a nonqualified annuity under a structured annuitization option is taxed in accordance with the exclusion ratio. The exclusion ratio treats each annuity payment as part principal and part interest, thereby excluding a portion of each payment from tax and taxing a portion. The exclusion ratio is the “investment in the contract” (i.e., total premiums paid) divided by the “expected return” (i.e., total amounts to be received). If the expected return is not based on a life expectancy – as would be the case with a fixed term of years option, for example – it is calculated simply by adding the total amounts to be received. If the expected return is based on a life (or joint life) expectancy, certain IRS-prescribed tables and multipliers are used to determine the total expected return.


By the way, that other rule about the 3-yr. payback, where you get the cost up front, and then all