Annuity Gift - A Blessing or Tax Curse

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Joined: Tue Sep 04, 2018 4:56 pm

Annuity Gift - A Blessing or Tax Curse

Post by ODIN »

I’ve been working for a small private company for the past 5-years. The owner of the company recently sold the business, and to reward his loyal employees, he funded a 5-Year 3% Guaranteed Annuity for each person.

He told me that I would be receiving an Annuity of $144,000, but that it would be taxed when the account was funded. Today I received a letter from the Insurance Company that issued the Annuity and it said that $104,000 was funded to my account, which means it was taxed at 28%.

Is that 28% the only tax I’ll have to pay for now until I begin receiving payouts from the Annuity when it’s considered ordinary income, or will I be taxed this year on all of my income - $205,000 Salary + $144,000 Annuity Bonus… a total of $349,000 Gross Income.

I’m worried that I’ll be taxed through the nose on the whole $349,000 even though a sizeable portion of that money is tucked away in the Annuity and can’t be used to pay for the tax liability if I owe.

Has anyone seen this situation before and able to shed some light? I’m not able to locate similar situations here or elsewhere and I’m eager to get a better understanding of the tax implications. Thanks in advance for any contributions to the discussion.

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Joined: Thu Mar 15, 2018 8:43 pm

Re: Annuity Gift - A Blessing or Tax Curse

Post by Frita »

From my limited experience, an employer’s contribution to a pension (which can be annuitized) is tax free until withdrawal. A bonus is taxed when received. Your “5 year 3% guaranteed annuity” sounds like something totally different.

Fortunately, you have some time to investigate and develop workaround strategies for the tax implications.

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Joined: Wed Jan 09, 2019 8:32 am

Re: Annuity Gift - A Blessing or Tax Curse

Post by anesde »

I’m not sure what a “5 year guaranteed 3% annuity is”. How does it work?

I’ve received “deferred income” from an employer before, which essentially was a pot of money that I could choose to invest where I wanted (via a platform, in my case Vanguard). However it was on a vesting program by which I could only withdraw/transfer/spend after 4 years. If I left I didn’t get it, and if I stayed it would be taxed alongside any other income at the 4 year vesting point.

I’ve also received equity grants on a similar vesting schedule from employers but again, only liable for taxes when the equity amount is vested which is on a defined schedule. I was eligible for dividends on any un-vested equity, which were paid in cash and taxed normally.

In general I would expect you’re only liable for income that is unrestricted, or when it becomes unrestricted. That said the tax code is complicated with many loopholes so perhaps “deferred income” and “deferred equity grants” are more tax advantageous vs “guaranteed annuity”.

Best of luck, and always remember - you’re getting taxed because you earned money so it’s generally a better position to be in then not having earned money :)

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