Are annuities taxable? It's an important question if you are shopping for annuities with the goal of guaranteed income. An annuity can help us sleep better at night, knowing how much income the contract will provide each month and that it can last as long as we do.
But while guaranteed income may sound good, there is also the flip-side to consider. You may wonder about whether annuity contracts might pose a potential tax trap.
It's smart to consider the topic. And why? Because taxes are a primary concern for people in retirement. While released in 2010, a survey by Lincoln Financial Group still has relevance today.
The study of affluent retirees found that federal income taxes were their largest expense. Among the respondents—age 62 through 75 with annual household incomes greater than $100,000—taxes were their largest expense. The survey results show that nearly 1 of every 3 dollars a retiree spent went to taxes.
Good news, though. A 2016 article by the Center for Retirement Research suggests that a "tax time bomb" may not be inevitable for many retirees. However, that premise is based upon 2007 U.S. household taxpayer numbers crunched by the Hamilton Project.
And other research, like a 2014 study on middle-income household awareness of retirement tax issues by Bankers Life, shows that taxes could well be a considerable chunk of future retiree spending.
All of which leads back to that question: How could throwing annuities into the mix affect a tax bill?
