- There are two types of annuities you can purchase: immediate or deferred. Immediate annuities convert your savings to regular monthly payments through a single premium payment. A deferred annuity defers this payment to you until you want to receive it.
- When making premium payments, these payments are not tax-deductible. Tax deductible payments normally apply to retirement accounts. However, annuities are considered non-qualified retirement accounts by the IRS and are not able to accept pretax contributions.
- The significance of annuity premium payments is that you're not able to contribute as much to your annuity as you would be able to contribute to other retirement accounts, like an IRA or 401k plan. This is because IRA and 401k plans accept pretax contributions.
- Even though annuities are non-qualified retirement plans, you aren't able to deduct the premiums paid to them. However, you can deduct premiums paid to an annuity if you purchase it inside of an IRA account.
- If you want the benefits of an annuity and also want to be able to deduct your premium payments, consider purchasing an IRA inside of an IRA. Alternatively, you may consider purchasing an IRA inside of a Roth IRA. While contributions are not deductible, withdrawals are tax free. This is important because annuity earnings are normally taxed when they are withdrawn. The use of the IRA helps to compensate for the shortcomings of not being able to deduct contributions to the annuity.