withdrawal from an annuity

Forum|Forum|2 years ago
February 7, 2024
1 reply
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When I took money out of my annuity, tax was withheld. Adding it to my income is adding more tax to pay. Why should I be taxed twice? It's also making me have to pay more for health insurance. I don't think this is fair. Is there any possibility of not counting it as income?

Best answer by dmertz

It's not being taxed twice. Your tax liability is not determined until you prepare your tax return and tax withholding from your annuity distribution is simply a down-payment on that tax liability. The federal tax withholding from box 4 of your Form 1099-R is credited on Form 1040 line 25b. State tax withholding is similarly credited on your state tax return.

dmertzAnswer

Employee

RebyosAuthor

Why is it considered income if I am taking my own money out of the annuity?

DavidD66

If your annuity is a qualified annuity, meaning an annuity purchased with money that has not been taxed, it is considered a qualified annuity. These categories of annuities are typically funded with money from 401(k)s or other tax deferred retirement accounts, such as traditional IRAs. Once you begin withdrawing money or receiving payments from a non-ROTH qualified annuity, the money received becomes fully taxable as income. This is because the money you used to fund the annuity has never been taxed.

If you purchased your annuity with after-tax funds, it is a non-qualified annuity. After-tax money means the money used to purchase the annuity has already been subject to tax. In a non-qualified annuity, only the earnings are taxed. Withdrawals from a non-qualified deferred annuity are taxed on a Last In, First Out (LIFO) basis, meaning that the interest and other other earnings that have accumulated in the annuity are considered to be withdrawn first, before you get any of your tax-free principal back.

Once you have annuitized your non-qualified annuity, the payments are a combination of taxable earnings and non-taxable principal.

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