Annuity Tax Basics
One of the primary benefits of investing in a variable annuity is that the earnings accrue on a tax-deferred basis. However, money withdrawn from a variable annuity can result in a tax reportable event depending on the type of contract you own and the type of withdrawal taken.
From nonqualified contracts all earnings (but not principal) will be tax reportable and are taxable at the ordinary income rate unless the money is transferred as part of an exchange of contracts under section 1035 of the Internal Revenue Code. All withdrawals from qualified contracts (IRA, 401K, etc..) that are sent to the contract owner are tax reportable. Withdrawals sent directly to other financial institutions into qualified plans may or may not result in a tax reportable event.
Please click here to view a chart of these events and their tax consequences.
Sample Tax Forms
1099-R Form When you withdraw money from your annuity (a distribution), the insurance company will provide you and the IRS with a 1099-R tax form in January of the year following your distribution. The information included in the form will help you prepare your income taxes. Please note: this form is due in February.
5498 Form The 5498 is the required tax form that informs both the client and the IRS of; total contributions, any rollovers, year-end account values if there were contributions or rollovers, and RMDs are required.
Neither John Hancock Life Insurance Company (U.S.A.), John Hancock Life Insurance Company of New York, John Hancock Distributors LLC, nor any of their representatives provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein.
When considering an annuity for use in an IRA or other tax-qualified retirement plan (i.e., 401(k), 403(b), 457), it is important to note that there is no additional tax deferral benefit, since these plans are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if some of the other features of the annuity are of value, such as access to specific portfolio choices, the ability to have guaranteed payments for life and other guaranteed benefits, and you are willing to incur any additional costs associated with the annuity to receive such benefits. See the prospectus for details.