The Cash Flow Clock: For Retirees - Book - Page 86
The Cash Flow Clock
would be taxable anyway. But if we are considering
a Variable Annuity as a risky non-qualified
investment, we would be much better off investing in
a brokerage account. Not only would we have access
to a broader range of investments, but our growth
would be taxed at long-term capital gains rates and
subject to the step up in cost basis. The Variable
Annuity growth is taxed at ordinary income and there
is no step up.
Someone will pay tax on the growth in a nonqualified annuity. When the tax is paid determines
how much is paid. Non-qualified annuities are taxed
based on LIFO (Last In First Out) accounting. This
means that the growth must withdrawn (and taxed)
first and the principal (which has already been taxed)
is withdrawn last. If the annuity is being used for
lifetime income, then the taxable and non-taxable
amounts are prorated each month. The Cash Flow
Clock can help us determine if a non-qualified
annuity makes sense for our financial plan.
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