The Cash Flow Clock: For Retirees - Book - Page 85
The Cash Flow Clock
It is important to understand that annuities are
investments. They can be held in any of the three tax
buckets. If they are in an IRA, then growth is tax
deferred and they are subject to all of the same tax
rules (RMDs, QCDs, etc.) as any other IRA. FIAs
can be a great fit for IRA accounts that are being used
for short term income and/or for QCDs.
If an annuity is in a Roth, then the growth is tax free.
Based on our asset location discussion, it is rarely a
good idea to use Roth assets for an annuity (unless
most or all of your assets are in a Roth). We want the
highest growth of your portfolio in the Roth so we
don’t want to limit it with caps and participation
rates.
Non-qualified annuities are a bit more complicated.
The growth in the annuity is tax deferred. This can
be great if we are in higher tax brackets now and
want to recognize the taxable income later down the
road instead of having to report income each year like
we would in a money market account. But this tax
deferral comes at a price. Growth is no longer
subject to long-term capital gains tax rates. It is also
not eligible for the step up in cost basis as part of
your estate. This is usually not a big deal if our
other consideration is a money market account that
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