Annuities Can Help Reduce or Eliminate the Tax on Your Social Security Benefits

Annuities Can Help Reduce or Eliminate the Tax on Your Social Security Benefits thumbnail image

Annuities Can Help Reduce or Eliminate the Tax on Your Social Security Benefits

Prior to 1984, Social Security income was tax-free. Today, however, taxpayers could be paying tax on up to 85% of their Social Security income. The good news is that annuities can help reduce and sometimes eliminate the income tax on your Social Security income! The IRS calculates the tax on your Social Security income based on your total income from all sources. However, income you earn on any annuity that is left to accumulate does not appear on your current tax return. Therefore, annuities may reduce your total income for Social Security benefit taxation purposes. In fact, if you shelter enough income in annuities and bring your income below the thresholds (adjusted gross income of $25,000 for a single taxpayer and $32,000 for a married taxpayer) you then pay no tax on your Social Security income. For your own benefit, please consult with a qualified tax advisor or attorney. Want to see if these calculations work to your advantage? Bring in a copy of your tax return (including Schedule B) to the rep who has provided this booklet to you. They should be able to let you know how much you could save in taxes.

Annuities can provide yet another benefit…

Cash Payments for Life

It’s possible to get a fixed return on your money with a fixed immediate annuity. Similar to other types of annuities, an immediate annuity involves a premium payment to an insurance company. In exchange, the company will immediately start making monthly payments to you. Part of these payments is considered income and part comes from your principal investment. These payments can last for a term of years or even for your lifetime if you choose. Note that immediate annuity payments could incur premium taxes in some states. Maintenance expenses and contract fees charged by the insurance company could also reduce your payments. For a detailed discussion on annuity income taxes, please revisit the article appearing earlier in thus booklet. The amount of money you receive each month is dependent on several factors, including your estimated life expectancy, the amount of money you have invested and the current interest rate being paid by the annuity company (which is locked in at the time of purchase). The payout will typically be higher the older you are because the insurance company does not expect to have to make payments as long as they would to younger person. Assuming that you have chosen the lifetime payment option, your annuity company will continue to make payments you even if you live past your normal life expectancy. If you die sooner, the insurance company keeps the balance of the annuity. You may also be able to elect to receive a lower payment in exchange for having the payments continued to your heirs until the entire amount of your original premium has been paid out.

For whom may a fixed immediate annuity be suitable?

  • A retiree needing increased monthly cash-flow
  • A person with no heirs or who is not concerned about leaving an estate
  • Someone who has set aside other funds to leave to heirs if they desire to leave an inheritance
  • A retiree desiring the fixed payment and wanting to avoid maturities, rolling over investments and the maintenance and administration required of investing on one’s own

What can you expect to receive on an immediate annuity?


Annuities Can Help Provide Insurance for Long-Term Care

More and more people know someone or have a family member who has needed long-term care. In fact, over half of those over age 50 will spend at least some time requiring nursing care. This is not medical care, but the type of care received in the home (shopping, meal preparation, assistance with bathing, eating, etc.) or in a nursing home. As you know, Medicare does not usually pay for this care. People are left to pay for this in one of three ways:
  1. Out of their own pocket (about $7,500 per month)
  2. Purchasing long-term care insurance while they are healthy
  3. Qualifying for Medicaid (different than Medicare)
Many people cannot afford the $7,500 or more per month that some nursing homes charge. That’s why many people are feeling the financial pinch within a year of entering a nursing home. This leaves many people exposed and unprotected from the catastrophic cost of long-term care. The state government may pick up the tab for you, but you have to spend down your assets. Depending upon your state’s Medicaid rules, this could leave you with little as $2,000 in liquid assets (Medicaid allowances do allow spouses to retain some additional assets). So, if you have $100,00 in the bank, you could be required to spend it on your care before the state provides any assistance. Prior to applying for Medicaid, it might be possible to shift some assets to the healthy spouse. Please note that transfers to other relatives could be subject to a look-back period of 60 months. If the transfer took place within the look-back period, the transferred asset will be counted as your property for Medicaid spend down purposes. There are ways to shelter your assets, however, and qualify for Medicaid without spending down your assets! One option is to place your funds in an immediate annuity. These annuities (when purchased in compliance with Medicaid rules) may be exempt assets, depending on how much you get and the state where you live. Some states exempt annuity payouts only up to a certain amount. That means you can keep this asset and still qualify for Medicaid payments. This Is one way to obtain government support for long-term care and not have to spend your last dime. The rules on this are particular and vary by state so please consult someone knowledgeable on Medicaid procedures or call for more information. Summary These are only a few ideas to help you better protect your annuity assets and make the most of what you worked hard to accumulate.

Financial and retirement planning can have an impact on your estate, even if your estate is of modest size.

  • Find an advisor who is knowledgeable in senior matters.
  • Find an advisor who will answer your questions as well as answer questions that you have not thought to ask.
  • Find an advisor who will point out opportunities and caution you about risks and one who is knowledgeable about the special needs of retired individuals.
With the sound advice of experience and conservative retirement plan, you and your family can get the most out of your assets.  

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