In a prescribed annuity. the amount of taxes due on the annuity stays the same year after year. For example, if an annuitant is receiving $1,000 monthly annuity payments for a total of $12,000 per year, the taxable amount might typically be $3000 the first year, $2800 the second year, $2500 the third year, and so on. With a prescribed annuity; however, the taxable portion of the annuity would be $2200 every year for the life of the annuity, regardless of whether the annuity was being paid to the annuitant or to his beneficiaries.
Prescribed annuities meet specific requirements for tax purposes that allow the annuity to be taxed at a level amount over its life. This rule only applies to prescribed annuities purchased with nonregistered funds, because annuities that are purchased with registered funds are taxed.
Prescribed Annuity Taxation
Prescribed annuities are an excellent option for the older generation which is approaching retirement age and wants to ensure financial stability during retirement. In order to determine the prescribed annuity tax rate. you simply divide the amount of capital contributed to the annuity during the accumulation period by the difference between the age you are at payout and the estimated life expectancy. In other words, if you are 62 when you begin to receive payments on your annuity and the life expectancy table suggests a life expectancy of 72, the 10 year difference would be divided into the total number of dollars you invested in the prescribed annuity. If you contributed $100,000 to the annuity, the tax-free amount would be $10,000 per year.
Prescribed annuities are an ideal
financial solution for a variety of situations. For example, if a couple wanted to ensure that both parties would continue to receive the same payment from the annuity regardless of which parties were to die first. Another scenario where a prescribed annuity would be beneficial is in the case where a person is required to maintain a life insurance policy, typically as part of a divorce settlement. The prescribed annuity would allow the person ordered to maintain life insurance to make the payments out of the annuity; but, if the other party were to die first, the insured would be able to drop the insurance and take the annuity payments for themselves. In a regular life insurance policy, this would not be possible.
Other Benefits of Prescribed Annuities
Prescribed annuities are often used for endowment purposes as well, for charities and universities. In fact, prescribed annuities are the perfect vehicle for setting up an annual contribution to a favorite charity, because it can be set up so that only the portion of the annuity payment that would be taxed is donated, removing the annuitant’s tax liability for the annuity payment.
The biggest benefit of a prescribed annuity is that it offers a double benefit of increasing capital while reducing taxes, thereby providing a secure income throughout the remainder of the life of one or more individuals involved in the contract. The prescribed annuity offers more flexibility to consumers and may even allow provisions that prevent the unused portion of the annuity to be forfeited by setting up a plan for heirs and beneficiaries. Annuity Basics
Types of Annuities