Federal Tax Considerations for Life Insurance + Annuities
Taxation IRA Distribution
a distribution from an IRA is subject to income taxation in the year the withdrawal is made. In case of an early distribution, prior to age 59 1/2, a 10% penalty will apply.
IRA Rollover
a rollover is a tax-free distribution of cash from one retirement plan to another. IRA rollovers must be completed within 60 days. Direct rollover is from the first plan to the trustee of the new IRA plan.
1035 Exchanges
certain exchanges of life insurance policies and annuities for an annuity, the policies and annuities must be on the same life and there is no income tax on these transactions.
Incidents of Ownership
an incident of ownership is defined as any one of the rights of policy ownership, such as the right to cash value, the right to change the beneficiary, the right to obtain policy loans, or the right to assign the policy.
Corporate Owned
annuities have different tax implications than individual annuities. Growth in the annuity is not tax-deferred. Interest income is taxed annually, unless the corporation owns a group annuity.
Cash Value Increase
any cash value accumulations in the policy can be borrowed against by the policy owner, or may be paid to the policy owner upon surrender of the policy. Cash values grow tax deferred.
Estate as Beneficiary
if the insured's estate is the designated beneficiary at the time of the insured's death, the entire face amount of the policy will be included in the taxable estate.
Transfer of Ownership
if the insured, as policy owner, assigns or transfers ownership of the policy or makes a gift of the policy within 3 years prior to his death, the entire face amount will be included in the taxable estate.
Beneficiary General Rule + Exceptions
life insurance proceeds paid to a named beneficiary are generally free of federal income taxation if taken as a lump sum.
Dividends
since dividends are a return of unused premiums, they are not considered income for tax purposes.
Values Included in Insured's Estate
the death benefit or face amount of a life insurance policy may be included in the insured's taxable estate at death and subject to the federal estate tax.
Taxation - Individually Owned
the exclusion ratio is used to determine the annuity amounts to be excluded from taxes. The annuitant is only able to recover the cost basis nontaxable.
Tax-Deferred Accumulation
the interest accumulated in an annuity is the tax base, but the taxes are deferred during the accumulation period.
Policy Loans
the policy owner may borrow against the policy's cash value. Money borrowed against the cash value is not income taxable.
IRA Transfer
the term transfer or direct transfer refers to a tax-free transfer of fund from one retirement program to a traditional IRA or a transfer of interest in a traditional IRA from one trustee directly to another.
Surrenders
when a policy owner surrenders a policy for cash value, some of the cash value received may be taxable as income if the cash surrender value exceeds the amount of the premiums paid for the policy.
Personal Life Insurance Taxation
1) Premiums are not tax deductible, 2) Death benefits are tax free if taken as a lump-sum distribution, 3) Death benefits in installments, principal is tax-free, interest is taxable.
Roth IRA
1) contribute 100% of income up to an IRS specified amount, 2) 6% penalty over that amount, 3) Grows tax free if account open for at least 5 years, 4) Contributions are not tax deductible, 5) Distribution cannot occur until the account is open for 5 years and the owner is 59 1/2, 6) Distributions are not taxable, 7) Payouts don't have to begin by 70 1/2.
Taxation IRA Contributions
1) tax-deductible contributions for the year of the contribution, 2) Contributions must be made in cash, 3) Tax-deferred earnings are not taxed until withdrawn.
Settlement Options
with settlement options, when the beneficiary receives payments consisting of both principal and interest, the interest portion of the payments received is taxable as income.