- Tax perks for long-term care. It’s usually tax-free to withdraw the interest on annuities if used to pay for long-term care insurance premiums.
- Taxes at death. You can leave either a qualified or nonqualified annuity to your spouse without having to pay taxes.
- Rollovers. A lump-sum payout from an IRA, 401(k), 403(b), or pension plan can be transferred to a qualified annuity without tax consequences.
- Deductibility. Within IRS limits, contributions to qualified annuities are deductible. Qualified annuities are subject to the same deductibility limits as any other IRA, 401(k), 403(b), or other qualified plans.
- Exchanges. It’s possible to exchange nonqualified annuities tax-free for another nonqualified annuity — this is known as a 1035 exchange. For example, a contract with poor features can be traded for one that offers better features or a higher rate.
- Defer RMDs with a QLAC. As long as it complies with IRS requirements, a QLAC is a qualified longevity annuity. You can defer up to 25% of RMDs until age 85, which reduces your federal taxes until the payments begin. Of course, you’d have to withdraw funds from your IRA eventually anyway, but a QLAC income is 100% taxable. You can also contribute 25% of your IRAs, or $135,000, whichever is less, to a QLAC over your lifetime.
Here are 6 tax advantages associated with annuities that you need to be aware of:
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