The exclusion ratio is a percentage that represents the portion of an annuity payment that is excluded from gross income and, therefore, not subject to ordinary income tax. It is calculated by dividing the premium by the expected return. Show
Fact Checked Annuity.org partners with outside experts to ensure we are providing accurate financial content. These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times. Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism. Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments. Cite Us APA Christian, R. (2022, October 12). Annuity Exclusion Ratio. Annuity.org. Retrieved November 6, 2022, from https://www.annuity.org/annuities/taxation/exclusion-ratio/ MLA Christian, Rachel. "Annuity Exclusion Ratio." Annuity.org, 12 Oct 2022, https://www.annuity.org/annuities/taxation/exclusion-ratio/. Chicago Christian, Rachel. "Annuity Exclusion Ratio." Annuity.org. Last modified October 12, 2022. https://www.annuity.org/annuities/taxation/exclusion-ratio/. Why Trust Annuity.org Annuity.org has provided reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities and financial literacy topics using plain, straightforward language. Our Partnerships, Vision and GoalsWe pride ourselves on partnering with professionals like those from Senior Market Sales (SMS) — a market leader with over 30 years of experience in the insurance industry — who offer personalized retirement solutions for consumers across the country. Our relationships with partners including SMS and Insuractive, the company’s consumer-facing branch, allow us to facilitate the sale of annuities and other retirement-oriented financial products to consumers who are looking to purchase safe and reliable solutions to fill gaps in their retirement income. We are compensated when we produce legitimate inquiries, and that compensation helps make Annuity.org an even stronger resource for our audience. We may also, at times, sell lead data to partners in our network in order to best connect consumers to the information they request. Readers are in no way obligated to use our partners’ services to access the free resources on Annuity.org. Annuity.org carefully selects partners who share a common goal of educating consumers and helping them select the most appropriate product for their unique financial and lifestyle goals. Our network of advisors will never recommend products that are not right for the consumer, nor will Annuity.org. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish. Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs. If you used proceeds from an IRA, 401(k) or other tax-deferred retirement account, the exclusion rate does not apply, and your annuity payments will be fully taxable. What Is an Exclusion Ratio?When you purchase an annuity, you pay an initial lump-sum premium to the insurance company to fund the policy. Once you begin receiving payouts from your annuity, a portion of each payment is not subject to income tax because it is considered a return of your principal. Since this principal was paid for with after-tax money, the IRS won’t tax you on it again. Did You Know? The IRS sometimes refers to the exclusion ratio as the General Rule or exclusion percentage in tax publications. However, this is only part of the check you receive each month, quarter or year from the insurance company. Over the years, your initial principal is earning interest, and that money is taxable. Think of it as a new earning. Likewise, gains made within a variable annuity’s investment subaccounts are also taxable. Essentially, any money that has not been taxed will have taxes deducted when it is distributed. Your insurance company should provide you with your contract’s monthly exclusion ratio. Example: How the Exclusion Ratio WorksLet’s assume you purchase an immediate annuity for $100,000 when you are 65 years old. The insurance company determines that you have a 20-year life expectancy and promises to pay you $565 a month for the rest of your life. Your initial $100,000 investment is expected to grow to $135,600 over those 20 years. Now, the insurance company must spread your initial $100,000 principal over 20 years. This would equal about $417 a month — but your contract entitles you to $565 a month. Expand The IRS does not tax $417 out of your $565 monthly payment because it considers this a tax-free return of your original principal. The insurance company is basically returning portions of the after-tax money you already gave them — plus interest. Therefore, you will be responsible for paying ordinary income tax on only $148 of your $565 monthly payout. This means the exclusion ratio is 73.7%, because this is the percentage excluded from taxes. The remaining 26.3% is taxable. Chris Magnussen, licensed insurance agent, covers how annuities are taxed. Special ConsiderationsThere is an important detail to keep in mind in the previous example: You have a 20-year life expectancy. But what if you live longer? You don’t have to worry about running out of money because the annuity guarantees you a steady stream of income for life. However, you will pay higher taxes if you surpass your life expectancy. By the time you are 85 years old, you have essentially recouped your entire original principal. From now until you die, all your payments are fully taxable. Also, the National Association of Insurance Commissioners notes that some states may levy a tax on the value of your annuity when you annuitize. This is called a premium tax, and the insurer will subtract this amount from your total contract value. Another important consideration is that exclusion ratios apply only to nonqualified annuities. If you use tax advantaged income, such as an IRA or 401(k) retirement account, then you will pay taxes on all the monthly payments you receive. After all, this money is tax-deferred, not tax-free. Fixed Income Annuities vs. Variable AnnuitiesCalculating the exclusion ratio of a fixed income annuity is easy because the insurance company pays you the same amount of money with each distribution, according to your contract. Therefore, the exclusion ratio should never change. While variable annuities follow the same basic exclusion ratio formula, a couple additional rules apply. These financial products include subaccounts invested in the marketplace. As the name implies, variable annuity payouts vary based on market conditions. The taxable portion of your variable annuity is calculated in the same manner as a fixed income annuity, by multiplying the number of total monthly payments by the dollar amount of each monthly payment, then dividing that figure by your initial lump-sum premium. However, if your payouts increase because stocks are performing well, you won’t get a bigger tax break. Let’s consider to our earlier example. You pay a $100,000 premium and have a 20-year life expectancy. About $417 a month is tax-free. Unlike our earlier example though, a variable annuity does not offer you the same $565 static monthly payment as the fixed annuity did. Some months you may receive $1,000. Other months it may be $750. Regardless, no matter how large your variable annuity payments become, only $417 a month is tax-free because this amount is still the return of your initial principal over 20 years. However, if the amount you receive from a variable annuity is less than the tax-free amount, you can apply the leftover tax-free amount to future payments. For example, one month the market performs poorly, and your variable annuity earns only $300. But up to $417 a month is tax-free. This means you can roll over the tax savings on the extra $117 by refiguring the tax-free amount. Be aware that the IRS has a procedure for refiguring your tax-free amount. You must file a statement with your tax return that includes the annuity start date, your age on that date, your original premium amount, and the total amount of tax-free money you have received. Please seek the advice of a qualified professional before making financial decisions. Last Modified: October 12, 2022
8 Cited Research ArticlesAnnuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
What is a periodic payment variable annuity?A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic pay- ments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
Which of the following features is common to variable annuities?A common feature of variable annuities during the accumulation phase is the death benefit.
Which one of the following statements regarding variable annuities is not true?All of the following statements about variable annuities are true EXCEPT: A) a minimum rate of return is guaranteed. Answer: A: The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value.
How are annuities classified on the basis of periodic payment?Common Types of Annuities
Fixed period annuities - pay a fixed amount to an annuitant at regular intervals for a definite length of time. Variable annuities - make payments to an annuitant varying in amount for a definite length of time or for life.
|
Which of the following statements is true concerning periodic payment variable annuities?
zusammenhängende Posts
Urheberrechte © © 2024 nguoilontuoi Inc.
