Is an annuity tax-free if purchased with insurance pay-out?

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A440
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Is an annuity tax-free if purchased with insurance pay-out?

Post by A440 » Sat May 11, 2019 5:15 pm

I couldn't find an answer to this. If DW purchases an annuity with the payout from a term life policy, is the annuity income tax-free? I believe the payout from term life is tax-free

The answer might help to lean in favor of whether or not to do a pension max strategy with a term life policy that gets her to max spousal benefit age for social security.
I don't know what the future holds, but I know who holds my future.

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BL
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Re: Is an annuity tax-free if purchased with insurance pay-out?

Post by BL » Sat May 11, 2019 8:16 pm

A440 wrote:
Sat May 11, 2019 5:15 pm
I couldn't find an answer to this. If DW purchases an annuity with the payout from a term life policy, is the annuity income tax-free? I believe the payout from term life is tax-free

The answer might help to lean in favor of whether or not to do a pension max strategy with a term life policy that gets her to max spousal benefit age for social security.
If she is a widow, she is no longer eligible for "spousal" benefits. Max survivor's benefit is at her FRA, or close to it, AFAIK.

I would think the amount put into the annuity is tax free, so only the increase is taxed. Don't remember the order it is taxed, though.

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Stinky
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Re: Is an annuity tax-free if purchased with insurance pay-out?

Post by Stinky » Sat May 11, 2019 9:00 pm

A440 wrote:
Sat May 11, 2019 5:15 pm
I couldn't find an answer to this. If DW purchases an annuity with the payout from a term life policy, is the annuity income tax-free? I believe the payout from term life is tax-free

The answer might help to lean in favor of whether or not to do a pension max strategy with a term life policy that gets her to max spousal benefit age for social security.
Annuity income is not tax-free. Amount deposited is not taxed, but earnings are taxed (at ordinary income rates).

Personally, I would not purchase an annuity under any circumstances, except for a SPIA . . . . .
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Topic Author
A440
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Location: NJ

Re: Is an annuity tax-free if purchased with insurance pay-out?

Post by A440 » Sun May 12, 2019 5:48 am

Yes, a SPIA would be the plan to give her her own "pension".
I don't know what the future holds, but I know who holds my future.

Edward Joseph
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Re: Is an annuity tax-free if purchased with insurance pay-out?

Post by Edward Joseph » Sun May 12, 2019 6:02 am

In this case, since the annuity would be purchased with after-tax money, only the "gains" are taxable. If the annuity is a deferred VA, the gains come out first (LIFO) and are taxed as ordinary income. If it's a SPIA, the gains are also taxed as OI, however they are spread out over her life expectancy or over the term chosen and thus a little more tax-efficient.

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