After-Tax Contributions

Last updated: October 7, 2015

After-Tax Contributions

The money contributed to an annuity may be with after-tax dollars. When you contribute after-tax savings to an annuity, you can put as much money in as you like.

  • However, there may be restrictions on the amount you may contribute with after-tax dollars if your annuity is a Roth IRA.

  • Before you put after-tax dollars into an annuity, it may be advisable for you to put the maximum pre-tax amount into a retirement plan such as your IRA, SEP, 401(k) or 403(b).

Deferred Annuities

When you withdraw money from a deferred annuity, you can spread the tax liability out for the rest of your life, no matter how long you live.

  • Some of the earnings are included in each payment and are taxable.

  • Meanwhile, tax-deferred earnings continue to accumulate on the remaining principal and earnings that have not yet been distributed.

  • Thus, receiving distributions as periodic payments after retirement may further reduce your income tax liability if you are in a lower tax bracket.

If the tax-deferred aspect of a deferred annuity is important to you, make sure the expenses do not outweigh the tax benefits.

  • This can be a tough judgment call, and you should consult a tax adviser for assistance in making this determination.

Variable annuities

Variable annuities purchased with after-tax dollars allow you to transfer money from one account to another without triggering a taxable event.

  • In other words, if you transfer money to a different funding option within your variable annuity, you will not have to pay taxes on any earnings you have made.

  • This reallocation of your money allows you to adapt to changing market conditions, or to adjust your investment goals because of life events tax-free, without worrying about reporting and taxing.

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