5 Estate Planning Moves to Make ASAP

One of President Biden’s campaign promises was to introduce tax reforms that roll back various Trump era policies while increasing tax rates for some of the wealthiest Americans. He will expand federal income tax for those earning $400,000 or more, plus increase capital gains and payroll taxes, in addition to expanding estate tax. If you are in the process of planning your estate or transferring wealth, chances are Biden’s policies could have an impact on your strategies. 

What to know about Biden’s tax plan

Biden’s tax plan integrates into his economic stimulus plan, which is predicted to raise revenue by $3.3 trillion in the next 10 years, not adjusting for macroeconomic feedback. Among the notable tax changes Biden will introduce, the individual income tax rate for those earning more than $400,000 will increase to 39.6%, up from its current 37%. For estate planning, Biden’s plan also has a number of ramifications. Notably, the estate tax exemption is expected to be halved, and the “step-up in basis” rule repealed. These actions could significantly impact the intergenerational transfer of wealth. 

Top estate planning moves to make right now

What should you do right now to respond to Biden’s tax plan? Here are five estate planning actions to take.

1. Take advantage of the estate tax exemption

Biden is expected to not only reduce the estate tax exemption but also increase the top rate of the estate tax. His plan calls for reducing the estate tax exemption to $3.5 million, where it was in 2009. He will also increase the top rate of the estate tax to 45 percent. 

Action steps to take: If you’re already engaged in strategic estate planning strategies to avoid a majority of estate tax, this might not have a major impact on your finances. However, if you haven’t started to work on estate planning, now is the time to create a framework so you can decide if you want to take advantage of the increased estate tax exemption while it lasts. The current estate tax expires in 2025, although Biden could tackle tax reform sooner than that. Could you use tax software to help you strategize? While some people do take a do-it-yourself approach to their estate planning, chances are you’ll have complex questions which could make hiring a tax professional worth it. 

2. Maximize low interest rates

With the federal interest rate at a near-historic low, now is the time to take advantage of wealth transfer strategies where interest rate plays an important role in determining a gift’s value. These could be anything from a grantor retained annuity trust (GRAT), to a charitable lead trust, or even loan-based techniques such as intra-family loans or self-canceling installment notes. These strategies typically work better when rates are low, so if you’ve been considering them for some time, now is the time to act. 

Action steps to take: Work with your advisor to determine the best way to take advantage of current interest rates based on your family’s circumstances and what you’re trying to do with your money. If you have estate tax exposure, finding ways to minimize that in the current interest environment can help lessen the impact of Biden’s proposed changes. Keep in mind that setting up a trust doesn’t happen instantly and it can take an attorney some time to draft the appropriate documentation. Many estate planning attorneys are experiencing high volumes of work due to the current market, so it’s best to start planning early. You can always wait to file the paperwork until you’re totally comfortable, but having it prepared and knowing the trusts you want to establish can help you make moves quickly should any market circumstances change. 

3. Communicate to heirs

In the rush to create your estate plan before Biden makes good on some of his campaign promises, don’t neglect to take the time to openly discuss your intentions with your heirs and beneficiaries. Though it might seem awkward or an unnecessary step when you’re busy making so many complex financial decisions, this is a best practice in estate planning. The clarity it creates can help avoid estate disputes in the future. 

Action steps to take: Schedule time with your heirs to have a formal meeting where you can review your estate plan and upcoming financial moves you plan to make that concern your heirs. Include any lawyers or estate planners in the discussion so they can thoroughly explain your decisions and the market factors that are influencing them. 

4. Adjust for changes to step-up in basis

The step-up in basis currently provides major tax benefits to many of those who inherit assets after the death of a loved one. When assets like a property or stocks are inherited, typically they are subject to capital gains tax as they have often appreciated since the time they were purchased. The step-up in basis moves the starting point for measuring capital gains to current market rates, effectively resetting it. Biden’s tax plan calls for eliminating the step-up in basis. If he follows through on this plan, heirs would then receive the carryover basis. 

Action steps to take: Biden hasn’t yet provided details on how he would eliminate the step-up in basis or when. If you want to take a “wait and see” approach to this policy-point, it’s still wise to develop a plan now so you can take action immediately should the change to the step-up in basis rule impact your finances. That means making preparations by talking to your estate planning team, creating a strategy for transfer of wealth, and even drafting the appropriate documents. 

5. Find an advisor you trust

Biden’s proposed tax changes can have complicated ramifications that can be hard to decipher on your own. If you don’t already have a financial advisor, professional tax preparer, or wealth management team, getting one in place could help you save money and headaches when it comes to planning your estate. Not only can these professionals help you find strategies you might have missed, they can also assist in the case of an audit, help you avoid mistakes, and help you develop a strong communications plan for sharing your wealth management strategy with your heirs. 

Action steps to take: Interview wealth management professionals comparing their rates and experience with your specific circumstances. Be sure to ask how you’ll be charged, if there is a cost to consultations, and if your estate planner has anyone in house to draft the legal paperwork or if attorney fees are separate. 

Final word

While Biden’s proposed tax reforms could have major implications when it comes to estate planning, it’s not entirely certain how soon he’ll enact his changes or how sweeping they will ultimately be. If you prefer to “wait and see” what will happen, it’s still smart to get a plan in place, with the necessary documentation, so you can quickly make changes if necessary. Remember that estate planning requires you to make many complex decisions that often take time to work through, especially if you include your heirs in the conversation. Start now if you haven’t already, and get a plan in place that allows you to maximize your wealth in any tax environment. 

The post 5 Estate Planning Moves to Make ASAP appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

What’s the Difference Between 401(k) and 403(b) Retirement Plans?

Investing in your retirement early is the best way to ensure financial stability as you age, especially when it comes to understanding various retirement options. Getting started may feel overwhelming — luckily we’re here to help. We help break down the difference between 401(k) and 403(b) accounts, and how they can impact your financial life.

You may already know the value in adjusting your budget to make saving for a rainy day a priority. But are you also prioritizing your retirement savings? If you’re just getting started in the workforce and looking for ways to invest in yourself, 401(k) and 403(b) plans are great options to know about. And, the main difference between a 401(k) and a 403(b) is the company who’s offering them.

401(k) accounts are offered by for-profit companies and 403(b) accounts are offered by nonprofit, scientific, religious, research, or university companies. To understand the similarities and differences between plans in depth, skip to the sections below or keep reading for an in-depth explanation.

How a 401(k) Works
How a 403(b) Works
The Difference Between 401(k) and 403(b)
The Similarities Between 401(k) and 403(b)
5 Ways to Grow Your Retirement Savings
What is a 401(k) and 403(b)
$19,500 with your employer matches. Plus, most retirement funds have required minimum distributions (RMDs) by the time you turn 70. This essentially means you have to take a minimum amount of money out each month whether you want to or not.

In most cases, employers will offer 401(k) matching to encourage consistent contributions. For example, your employer match may be 50 cents of every dollar you contribute up to six percent of your salary. For example, with this employer match on a $40,000 salary, you would contribute $200 and your employer would contribute an additional $100 each month. This pattern would continue until your annual contributions hit $2,400 and your employer contributes $1,200.

Employee matching is essentially free money. You’re monetarily rewarded for your retirement payments. Be sure to pay attention to vesting periods when setting up your employer match. Vesting periods are an agreed amount of time you need to work at a company before you receive your 401(k) benefits. For example, some companies may require you to work for their team for a year before earning retirement benefits. Other employers may offer retirement benefits starting the day you start working with them.
403(b) accounts include school boards, public schools, churches, hospitals, and more. This type of account is also known as a tax-sheltered annuity plan — they allow pre-tax income to be invested until taken out.

Employers that offer 403(b) retirement plans may offer a pool of provider options that undergo nondiscrimination testing. This allows employers that qualify for this account to shop around for plans that offer the best benefits and don’t discriminate in favor of highly compensated employees (HCEs). For instance, some 403(b) accounts may charge more administrative fees than others.

Employers are able to offer employee matching on 403(b) accounts if they decide to. To cut costs for nonprofit companies, 403(b) retirement plans generally cost less than 401(k) accounts. Costs associated with starting up these accounts may not affect you, but it may affect your employer.

Account Type 401(k) 403(b)
Yearly Contribution Limit $19,500 $19,500
Employer-Issued Packages For-profit employers:
Corporations, private establishments, etc. and sole proprietors
Non-profit, scientific, religious, research, or university employers:
School boards, public schools, hospitals, etc.
Minimum Withdrawal Age 59.5 years old 59.5 years old
Early Withdrawal Fees 10% penalty, tax, and additional fees may vary 10% penalty, tax, and additional fees may vary
Source: IRS.org


The Differences Between 401(k) and 403(b)

Both a 401(k) and 403(b) are similar in the way they operate, but they do have a few differences. Here are the biggest contrasts to be aware of:

  • Eligibility: 401(k) retirement plans are issued by for-profit employers and the self employed, 403(b) retirement plans are for tax-exempt, non-profit, scientific, religious, research, or university employees. As well as Hospitals and Charities.
  • Investment options: 401(k)s offer more investment opportunities than 403(b)s. 401(k) accounts may include mutual funds, annuities, stocks, and bonds, while 403(b) accounts only offer annuities and mutual funds. Each employer varies in retirement benefits — reach out to a trusted financial advisor if you have questions about your account.
  • Employer expenses: 401(k) accounts are generally more expensive than 403(b) accounts. For-profit 401(k) accounts may pay sales charges, management fees, recordkeeping, and other additional expenses. 403(b) plans may have lower administrative costs to avoid adding a burden for non-profit establishments. These costs vary depending on the employer.
  • Nondiscrimination testing: This form of testing ensures that 403(b) retirement plans are not offered in favor of highly compensated employees (HCEs). However, 401(k) plans do not require this test.


The Similarities Between 401(k) and 403(b)

Aside from their differences, both accounts are set up to aid employees in retirement savings. Here’s how:

  • Contribution limits: Both accounts cap your annual contributions at $19,500. In the event you contribute over this limit, your earnings will be distributed back to you by April 15th. If you’re under your retirement contributions by the time you’re 50 years old, you’re allowed to make catch-up contributions. This means that, if you’re eligible, you can contribute $6,500 more than the yearly contribution limit.
  • Withdrawal eligibility: You must be at least 59.5 years old before withdrawing your retirement savings. In the case of an emergency, you may be eligible for early withdrawal. However, you may be charged penalties, taxes, and fees for doing so.
  • Employer matching: Both retirement account options allow employers to match your contributions, but are not required to. When starting your retirement fund, ask your HR representative about potential benefits and employer matching.
  • Early withdrawal penalties: If you choose to withdraw your retirement savings early, you may be penalized. In most cases, you need a valid reason to withdraw your funds early. Eligible reasons may include outstanding debt, bankruptcy, foreclosure, or medical bills. In addition, you may be charged a 10 percent penalty fee, taxes, and other fees. During a downturned economy, as we’ve seen with the COVID-19 pandemic, fees may be waived.

5 Ways to Grow Your Retirement Savings
retirement plan options and their benefits. When employers offer retirement matches, consider contributing as much as you can to meet their match.

2. Set up Monthly Automatic Contributions

Save time and energy by setting up automatic contributions. You may feel less interested in contributing to your retirement as your payday approaches. Taking time to set up a retirement fund and budgeting for this change may be holding you back. To meet your retirement goals, consider setting up automatic payments through your employer. After a while, you may not even notice the slight budget adjustment.

3. Leverage Employer Matching

Employer matching is essentially free money. Employers may put money towards your future for nothing but your own contribution. This encourages employees to consistently put money towards their retirement savings. Not only are you able to earn extra money each month, but this “free money” will grow with interest over time. If you can, match your employer’s contribution percentage, if not more.

4. Avoid Early Withdrawal

Credit card balances, student loans, and mortgages can be stressful. Instead of withdrawing early from your retirement fund to pay for these, consider other debt payoff methods. If you’re eligible to withdraw from your retirement early, you may face penalty fees, taxes, and administrative expenses. This may hinder your savings potential or push back your desired retirement date.

5. Contribute Your Future Raises and Bonuses

If you’re saving less than $19,500 to your retirement fund this year, consider contributing more. If you earn a bonus or a raise, stick to your current budget and consider increasing your contributions. Ask your employer to increase your retirement payments right before you receive a bonus or raise. The more you contribute, the more interest you’ll accrue over time.

Whether your retirement funds are established through a 401(k) or a 403(b), these accounts offer you the chance to build your financial portfolio. Consistently funding your retirement account may better your financial plan and set you at ease. As your contributions age, so do your interest earnings. You’ll be able to make money on your pre-taxed income and set your future self up for success. Get started by checking in on your budget and carving out a specific amount to put towards your retirement each month.

The post What’s the Difference Between 401(k) and 403(b) Retirement Plans? appeared first on MintLife Blog.

Source: mint.intuit.com

What You Should Know About Annuities

Money Girl listener Marsha U. writes: "I work at a university, so my retirement is through TIAA. When I recently spoke to their rep, she suggested an annuity with half a variable product. I'm 65 years old and will retire at 70, so I have some time to decide. Can you explain what I should know about annuities?"

Thanks for your question, Marsha! Annuities can be a wise way to save for retirement if you fully understand them. So, I'm delighted you asked. This episode will review how annuities work, the different types, and how they relate to saving enough for a comfortable retirement.

What Is an Annuity?

Annuities have been around for a long time and are commonly used by retirees who want to make sure they'll have a regular income for the rest of their lives. Since getting a big, fat pension from your employer is a luxury that fewer American workers can look forward to, an annuity may complement other retirement plans you have.

In its simplest form, an annuity is a contract between you and an insurance company that provides a combination of insurance and investment features. 

In its simplest form, an annuity is a contract between you and an insurance company that provides a combination of insurance and investment features.

Annuities are sold by various institutions and professionals, such as insurers, banks, brokerages, and financial advisors. The investment firm that manages Marsha's retirement, TIAA, is one of the largest pension funds in the U.S. They manage retirement accounts for workers in many fields, including universities, government, nonprofits, and medical services.

To purchase an annuity, you make one or multiple payments in exchange for a set amount of income for a period. Depending on what type of annuity you select, it may give you the following benefits:

  • Guaranteed income for your entire life
  • Tax-deferred growth
  • Guaranteed investment return
  • Protection from investment losses
  • Flexible withdrawals
  • Protection for your beneficiaries

One advantage of an annuity is that you can contribute as much as you want for retirement, provided you have a non-qualified annuity (I'll get more into that later). Unlike other tax-deferred vehicles, such as a workplace 401(k) or an IRA, annuities have no annual contribution limits. That can be particularly helpful if you're close to retirement age and need to catch up. 

How Do Annuities Work?

As I mentioned, you can purchase an annuity by making a lump sum payment or multiple payments, called premiums, over time. In return, the annuity provider invests your money and typically gives you a series of payments, known as annuitization.

Here are three main types of annuities:

1. A fixed annuity pays out a fixed rate of return on your money for life or a specific period. It's a guaranteed, predictable income stream, no matter what's going on in the financial markets. 

2. A variable annuity pays out a variable rate of return on your money. The income stream usually has a minimum guaranteed amount, but can increase depending on the performance of the underlying investments that you select, such as stocks or mutual funds. 

3. An indexed annuity pays a return on your money that's tied to an economic index, such as the S&P 500. It's considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment for life or a period. However, you can also enjoy a higher return when there are gains in the broader market.

Marsha said that TIAA recommended a half variable annuity. I'm not sure exactly what the rep meant, but it may be an indexed product. With variable and indexed annuities, you have more risk, but you also have the opportunity for higher returns depending on the performance of the financial markets.

What Is an Immediate Annuity?

In addition to annuities having different investment options, there are two main ways an annuity can pay you, depending on whether it is immediate or deferred. 

An immediate annuity provides income right away or at least a year after you buy it. You make a lump sum payment, called a single premium, and start receiving a monthly income stream.

Let's say that you receive a life insurance payment of $1 million after taxes, and you want to create a monthly income by putting it in an annuity. You can use various immediate annuity calculators to see the payout based on your age and gender. 

If you're a 40-year-old female, a $1 million annuity will give you a little more than $3,000 a month for the rest of your life. The payout changes depending on when you buy an annuity. If you purchased the same $1 million annuity at age 60, it would pay out a bit more than $4,000 per month.

What Is a Deferred Annuity?

The other broad category of annuities is a deferred annuity, where you receive income at a future date. You make one or multiple contributions during the annuity's "savings phase" and then receive income either as periodic payments or as a lump sum during the "distribution phase." The payout doesn't begin for at least a year after your last premium payment but may be deferred by up to 40 years. 

A deferred annuity is similar to retirement investing where you set aside money over time to access in the future. In fact, you can own a deferred annuity inside of a retirement account, such as a traditional IRA, 401(k), or 403(b). That's probably the situation with Marsha's TIAA account.

What Is a Qualified Annuity?

If you own an annuity inside a retirement account, it's called a qualified annuity and is subject to traditional retirement account rules. For instance, your contributions are tax-deductible, up to the annual IRS limit. And you defer paying tax on the annuity's earnings each year until you make withdrawals after age 59½.

You must begin taking distributions with a qualified annuity once you reach age 72, following traditional retirement account rules.

What Is a Non-Qualified Annuity?

When you own an annuity outside of a retirement account, it's called a non-qualified annuity, and you only have the option to contribute after-tax dollars. There are no annual contribution limits, so you can put in as much money as you like. 

Even though you pay tax upfront on contributions to a non-qualified annuity, you defer paying tax on investment earnings until you take withdrawals after age 59½. And unlike a qualified annuity, you don't have to start taking distributions at any specific age. 

So you don't get as many tax advantages with a non-qualified annuity; however, it doesn't come with as many restrictions.

What Is an Annuity Rider?

Like adding a rider to a home insurance policy to protect valuable jewelry, you can add a rider to an annuity and receive optional benefits above the standard contract. A few common annuity riders include:

  • Income rider provides guaranteed income for a certain period that you can turn on in the future. That's a popular option for retirees who want to make sure they don't run out of money during their lifetime.
  • Death benefit rider ensures that if you die, your beneficiary receives the balance of your annuity, not the insurance company. For example, if you purchase an annuity for $100,000 but die after receiving only $20,000 in distributions, your beneficiary will receive the $80,000 balance.
  • Nursing home rider helps pay for expensive long-term care, either at home or in a nursing facility. For instance, it may double your monthly income or allow you to withdraw more of your annuity balance to cover your added costs.  
  • Terminal illness rider allows you to access some or all of your annuity balance without having to pay early withdrawal fees or surrender penalties if you're diagnosed with a terminal illness that reduces your life expectancy.

Adding a rider to an annuity gives you extra financial protection, but it comes with a cost because it increases the amount of income you'll receive.

Can You Tap an Annuity Early?

A deferred annuity acts a bit like a retirement account, even if you don't own it inside of a retirement account. You enjoy tax-deferred growth until you take withdrawals after age 59½. But you'll need to wait until 59½ if you want to enjoy the full benefit of your annuity. 

Taking an early withdrawal from an annuity is typically subject to income tax, plus a 10% penalty. Some annuity providers also charge an additional penalty, called a surrender charge, for taking an early withdrawal.

What Are the Downsides of Annuities?

The main advantage of an annuity is getting payment amounts that an insurance company partially or fully guarantees. That's something most regular investments, such as mutual funds, can't provide.

However, regular investments, such as stocks and stock funds, offer a long-term upside that annuities generally can't match. In other words, buying an annuity means you're protected from the market going down, but you give up the opportunity to earn higher returns. Plus, annuities generally come with higher fees than regular investments.

Remember that the value of an annuity is reducing your investment risk. It gives you a guaranteed income but not necessarily the highest potential income for your money. In exchange for an annuity's fixed or guaranteed payout, it limits your possibility of getting higher income when the market goes up.

Only you can decide whether having a potentially lower amount of guaranteed income is the best choice for you.

By transferring the risk of investing to an insurance company, it may give you peace of mind that your income in retirement would never dip below a threshold. But the downside is that if you had put money in regular investments instead of an annuity, your retirement income could be higher. Only you can decide whether having a potentially lower amount of guaranteed income is the best choice for you.

Get Financial Advice About Annuities

There's a lot to consider when it comes to annuities, such as taxes and estate planning. In addition to the riders we covered, there are many more options you can choose at an additional cost, such as a cost-of-living adjustment to increase your income each year.

Marsha, you're doing the right thing by speaking with a professional about your options. I'd make sure you fully understand the pros and cons of different annuities and riders until you're confident that it meets your and your family's needs.

Since annuities are complex financial products, always consult with a qualified financial advisor about whether buying one is a good fit for your long-term financial and retirement planning strategy.

Source: quickanddirtytips.com

Who Has to Take an Annuity RMD?

An annuity salesmanAnnuities are appealing to many investors because they offer tax-deferred growth and the potential for guaranteed income that you cannot outlive. The tax-deferred growth is similar to the features of a 401(k) or a traditional IRA. While certain retirement accounts are subject to required minimum distributions (RMD), do those same rules apply to annuities? In this article, we’ll discuss the required minimum distribution rule and define who has to take an annuity RMD. If you’ve got questions about annuities or RMDs, consult a financial advisor.

What Are Required Minimum Distributions (RMDs)?

Tax-deferred investments, like annuities, 401(k), and traditional IRAs, allow your money to grow without paying taxes each year. During this time, the government does not collect revenue on this growth. Once you reach 72 years old, the government requires you to start withdrawing a minimum amount from certain accounts so that it can collect taxes on your withdrawals.

The required minimum distributions (RMDs) are based on your portfolio size, age, and expected lifespan according to the “uniform lifetime table.” RMDs start out around 4% of your retirement portfolio balance and increase as you get older. This means that each year you’re required to withdraw a larger percentage of your account balance than the year before.

Tax laws state that you must start taking RMDs from retirement accounts no later than April 1 of the calendar year after you turn 72. If you turned 72 on September 1, 2021, then you must start taking withdrawals before April 1, 2022. The government charges a steep excise tax penalty of 50% for required amounts not taken by the deadline. This excise tax is on top of the normal income taxes on withdrawals and any other penalties and interest that may apply.

Benefits of an Annuity

Annuities offer many attractive features for investors. These benefits include:

  • Tax-deferred growth. Growth in your account balance does not require annual tax reporting or payments.
  • No contribution limits. Unlike retirement accounts, like a 401(k) or IRA, there is no limit to how much you can contribute to an annuity.
  • Choice of investment options. Depending on the company, your annuity can invest in a variety of investments, including fixed income, stock accounts, and more. Fixed annuities offer returns similar to CDs or bonds, while variable annuities can be invested in accounts similar to mutual funds.
  • Flexible withdrawal strategies. When you’re ready to start withdrawing, you can withdraw a lump sum, set up periodic withdrawals, or annuitize your balance for lifetime income.
  • Lifetime income benefits. An annuity’s unique advantage is that it can provide guaranteed lifetime income that you cannot outlive. This addresses one of retirees’ biggest fears.
  • No mandatory withdrawals. While retirement accounts require RMDs at age 72, you are not required to start withdrawals at any age. The only exception is if your annuity is held within a retirement account.
  • Death benefit to beneficiaries. Annuities include an insurance component that guarantees a death benefit to your beneficiaries if you die before withdrawals begin, even if your account balance has dropped due to market performance. Annuity distributions generally also avoid probate.
  • Tax-advantaged withdrawals. When you annuitize your account balance, your monthly payments are a combination of principal and earnings. This means that a portion of your payment is a return of your investment, which is not taxable.

Who Has to Take an Annuity RMD?

Collection of rare American coinsBecause annuities offer so many benefits that are attractive to certain investors, sometimes they are held within a retirement account. These accounts are known as “qualified annuities” because they are held in a qualified retirement account. Qualified retirement accounts include traditional IRA, 401(k), 403(b), 457, SEP-IRA, and similar accounts.

Qualified annuities must follow RMD rules just like any other stocks, bonds, or investments held within that retirement account.

Roth IRA and Roth 401(k) accounts do not require minimum distributions, so annuities held in those accounts are not subject to RMDs. Since Roth contributions are made with after-tax money, they are considered non-qualified retirement plans.

Many annuity benefits are lost when held in a qualified retirement account

When you hold an annuity in a qualified retirement account, you lose out on four important benefits:

  • Tax-deferred growth. Retirement accounts already offer tax-deferred growth, so there’s no additional tax benefit from the annuity.
  • No contribution limits. Even though annuities do not have contribution limits, your retirement account contribution limits are based on those rules instead. For example, traditional IRA contribution limits are $6,000 per year ($7,000 for 50 and older).
  • No mandatory withdrawals. Withdrawal requirements are determined by the retirement account. Annuity RMDs are required once you reach 72 years of age.
  • Tax-advantaged withdrawals. When you withdraw from a retirement account like a 401(k) or traditional IRA, every dollar of the withdraw is considered taxable income. Both the principal and earnings withdrawn are subject to income taxes.

The Bottom Line

Two women discussing an annuity RMDAnnuities generally are not subject to RMD rules. You do not have to start withdrawing at age 72 and there is no minimum withdrawal required. However, when an annuity is owned by a qualified retirement plan, then you must meet annuity RMD withdrawal amounts each year. If not, you’ll owe an excise tax of 50% of the amount that you were supposed to withdraw, but didn’t. When you add in taxes, penalties, and interest, the government could take close to 100% of your required minimum withdrawal amount.

Tips for Investing 

  • An annuity can be an important part of your retirement income strategy. To determine how much income that you’ll need to meet your retirement goals, use our retirement calculator to determine how much you’ll need to save for retirement.
  • If you’re considering investing with an annuity, we recommend speaking with an investment professional who can help you compare the pros and cons of each product.

    Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.

Photo credit: ©iStock.com/FG Trade, ©iStock.com/m.czosnek, ©iStock.com/Drazen_

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