general q: taxes on annuities from 401ks

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nick evets
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Joined: Wed Mar 01, 2017 5:40 pm

general q: taxes on annuities from 401ks

Post by nick evets » Mon Mar 25, 2019 7:32 am

Hi all -- I'm a bit confused about something and just want to clarify...

I can convert part or all of my 401k to a lifetime annuity through my plan provider. My understanding is the annuity payments would be taxed at ordinary income rates. What if I wanted to purchase a 10 year simple annuity, and the plan provider didn't offer it but 3rd party did? Would I be taxed on the initial withdrawal for the 10 year SPIA, and then...taxed as if I purchased the annuity from a taxable account? Thx

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ResearchMed
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Re: general q: taxes on annuities from 401ks

Post by ResearchMed » Mon Mar 25, 2019 12:40 pm

nick evets wrote:
Mon Mar 25, 2019 7:32 am
Hi all -- I'm a bit confused about something and just want to clarify...

I can convert part or all of my 401k to a lifetime annuity through my plan provider. My understanding is the annuity payments would be taxed at ordinary income rates. What if I wanted to purchase a 10 year simple annuity, and the plan provider didn't offer it but 3rd party did? Would I be taxed on the initial withdrawal for the 10 year SPIA, and then...taxed as if I purchased the annuity from a taxable account? Thx
My understanding is the following:

Yes, you'd pay regular taxes for the initial withdrawal (which could put you into higher tax rates).
But if you buy the annuity with those after tax dollars, then your taxes would only reflect the "income/gains" from the annuity, and not the return of your own money (which was already taxed), which is part of what annuity payments include.

OR... you might be able to move the 401k money to an IRA, and then you'd have a choice of annuity providers, and could get a tax-deferred annuity. In that case, you'd be paying regular taxes on each payment, because you haven't yet paid any taxes on that money. It would be like "continuing your paycheck" or a pension.

Once you remove the money from a tax-deferred account, the history of that money doesn't matter. It could be from savings, 401k/IRA withdrawals, gambling, or whatever.

Separate question: What is the point of your 10 year annuity? That's not generally the best use of annuities (which would be SPIA *life* type annuities). You'd be paying someone else to dole out your own money back to you, plus modest (probably very modest) interest. Comparing CD rates, for example, you might be able to get a CD ladder at similar or better rates, and you retain control of that money as well.

RM
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