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76 million Baby Boomers
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An
annuity
is an insurance contract. An annuity
contract is created when an individual gives the insurance company
money which may grow tax deferred and then can be distributed back to
the owner in several ways.
Annuity contracts in the United States are defined by the
Internal Revenue Code and regulated by the individual states. Annuities
have features of life insurance and investment products. In the US,
annuity contracts are only allowed to be sold by insurance companies,
although private annuity contracts may be arranged between donors to
non-profits to reduce taxes.
Insurance companies are regulated by
the states, so contracts or options that may be available in some states
may not be available in others. However, their tax treatment is dictated
by the Internal Revenue Code.
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| There are two
types of annuity contracts: the immediate annuity, which guarantees
payments for a period of years or the lifetime of an individual or
couple, and the deferred annuity, which grows tax deferred until such
time as the annuity contract is annuitized (converted into an immediate
annuity) or cashed in (either in periodic withdrawals or in a lump sum). |
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In the U.S. Internal Revenue Code, the
growth of the annuity value during the accumulation phase is tax
deferred, that is, not subject to current income tax for annuities owned
by individuals. The tax deferred status of deferred annuities has led to
their common usage in the United States. Under the US tax code, the
benefits from annuity contracts do not always have to be taken in the
form of a fixed stream of payments (annuitization), and many of the
contracts are bought primarily for the tax benefits rather than to get a
fixed stream of income. If an annuity was used in a qualified pension
plan or an IRA funding vehicle, then 100% of the annuity payment is
taxable as current income upon distribution. If the annuity contract is
purchased with after-tax dollars, then the contract holder upon
annuitization recovers his basis pro-rata in the ratio of basis divided
by the expected value according to the IRS regulations from Section
1.72-5. After the taxpayer has recovered all his basis, then 100% of the
payments thereafter are subject to ordinary income tax. |
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Annuity Contracts | Variable Annuities
76 million Baby Boomers
are heading for retirement.
|