Tax Shelter AnnuityThere are some varying definitions of what a tax shelter annuity actually is, but basically, it is a means of minimizing taxable income using legal investment tools such as annuities. In many cases, these are offered through an employer and are governed by the rules set by the issuer as well as the employer’s rules.
In other cases, a person may also choose to invest in an annuity plan on their own. This is possible but to be eligible for the tax shelter benefits the IRS has established some rules.These include early withdrawal penalties. These actually work to encourage a person to save toward retirement. In the case of early withdrawal penalties, taxes must be paid on the amount withdrawn equivalent to the taxes that were deferred when the funds were invested as well as a percentage penalty. Tax shelter annuities can be excellent supplemental investments as long as the investor does not need to withdraw funds early. How an annuity is funded makes a difference in how it is treated. Rollovers from other tax shelter funds may incur additional taxes when disbursement begins.
One important question to answer when considering a tax shelter annuity is whether the annuity has a fixed life and if so then can the sum be rolled over to another annuity? This is particularly applicable when considering an annuity where the annuity is distributed in a single lump sum. In today’s economy, spreading out investments is considered financially sound strategy and a tax shelter annuity can help you minimize your taxes but it should not be considered tax-free, as taxes will have to be paid at some point on a portion of your gains. The longer the person has until retirement the more risks they can afford to take is the general advice given by financial experts. The possible returns should be weighed against the security and tax shelter benefits when considering an annuity.Another factor in these tax shelter annuity programs is that administration fees will apply since the issuer must actually administer the funds. Those costs must be part of the equation and should be reasonable. The drawbacks are usually acceptable to investors whose long-term plans include cushioning their retirement with a tax-sheltered annuity. Annuities are not all tax sheltered but still receive excellent treatment as regards taxation. For instance in a whole life fixed rate annuity only a small portion of each annuity payment is considered taxable while the remainder is considered the principle on which tax has already been paid and hence it is exempt. Careful consideration of the laws is needed to determine which annuity type is tax sheltered and which is tax deferred or favored. Whether you choose to invest in an immediate annuity or a TSA, they can be valuable for estate planning, retirement income and as another means of diversifying your portfolio.
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