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Potential Tax Liability of an Annuity for Heirs
Stock Mutual Fund Annuity
Investment: $100,000 $100,000
Value at Owner’s Death: $200,000 $200,000
Taxable Amount for Heirs: $0 $100,000
The step-up in cost basis means that heirs would pay no taxes
upon the sale of mutual funds, but they would pay ordinary
income taxes on gains in the annuity.
Annuities in IRA Accounts
Keep in mind that these drawbacks apply to annuities held in non-
qualified accounts. Annuities held in an IRA, IRA rollover, or other
qualified accounts don’t have these drawbacks when it comes to
taxation.
Summary
► Annuities grow tax-deferred during accumulation.
► Gains from an annuity contract are treated as ordinary
income.
► Heirs don’t receive a stepped-up cost basis for annuity gains.
Chapter 4: Annuities
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