Tax Deferral - Annuities

Advantages of getting an  Annuity

Safety of Principal!

Annuity Introduction

Most people have worked hard all their life accumulating their “nest-egg”. They should not put their money in risky investments, especially our senior citizens. Most seniors are more concerned about the “return OF their money than the return ON their money”. Annuities are considered to be safe investments for the following reasons:

  • No market risk
  • Backed by the financial strength of large life insurance companies who are required to set aside a portion of their assets (reserves) to cover claims.
  • They also spread their risk through the industry’s reinsurance network, i.e. several companies share in a particular risk.
  • Tax Deferral – Taxes are paid only when money is received. IRC Section 72  This results in a much faster cash build-up. Your principal grows because you receive:
    • 1) interest on the principal;
    • 2) interest on the interest;
    • 3) interest on the money that normally would have been paid in taxes.
  • Competitive Interest Rates – At present, and historically, annuities outperform CD’s and money market accounts.
  • Accessibility– One of the biggest concerns, especially with seniors, is “Do I Have Access to My Money, Should I Need It?” There are a number of choices:
  • Withdraw interest as needed, monthly, quarterly, etc.
  • Exercise free withdrawal privilege
  • Total surrender
  • Annuitize (choose one of a number of income options)
  • Avoids Probate – By naming a beneficiary, your annuity account is paid directly to a named individual, making it accessible and eliminating probate costs.
  • Interest Rate Guarantees – Almost all annuity contracts have minimum rate guarantees…the rate can never go below a specified amount.
  • Current Income Reduction – CD’s, money market accounts, savings accounts, etc. require current taxation of interest earned even if it is not taken. Annuities are taxed only upon receipt of interest.
  • Lifetime Income Option – Annuities are the only investment vehicles available that guarantee you cannot outlive your monthly payments

Avoid Risk and invest in a tax deferred annuity!


You get:

  • Triple Compounding
  • Tax Savings
  • No Fees or Load Charges
  • Competitive Interest
  • Probate Avoidance
  • No Market Risk
  • Does not affect taxation of your social security
  • Liquidity (Ability to withdraw funds)  (Brsan)

Power of Tax Deferral -
from North American Brochure  
Tax Deferral

How much of your #Pension & Annuity Income goes on line 5a of IRS 1040 and
thus counts towards MAGI Income for Covered CA subsidies?

Covered CA (& Medi Cal) - Calculate - #Countable Sources of  MAGI Income countable income

Just the Count Taxable Portion of your Pension

reverse annuity

non taxable annuity

Calculate your  Covered CA MAGI Income

take #Line8b 11 Adjusted Gross income then add line 2a, 6a &   8 (Foreign Income)


MAGI Income from 1040

Covered CA (& Medi Cal) - Calculate - #Countable Sources of  MAGI Income countable income

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4 comments on “Annuities & MAGI Income Taxation Exemption

  1. I’m under 65. Healthy. I get MAGI Medicaid in AZ.

    What if I take my savings and put into an annuity?

    Nothing will be considered MAGI income until I withdraw or take pay out,, correct??

  2. When taking withdraws from a NON-QUALIFIED ANNUITY:

    Does ONLY the interest earned on the non-qualified annuity count towards the MAGI?

    Or, does the principal(cost basis or purchase price) PLUS the interest earned count towards the MAGI?

    • We are not giving tax or legal advise. Here’s our research. Check with your CPA. This is really a question for your CPA as Covered CA MAGI goes mainly by what is your adjusted gross income.

      A non-qualified annuity is purchased with after-tax dollars that were not from a tax-favored retirement plan. Non-qualified annuity premiums are not deductible from gross income.

      Only your earnings are taxed as income; principal is not.

      The amount of taxes on non-qualified annuities is determined by something called the exclusion ratio. The exclusion ratio is used to determine what percentage of annuity income payments is taxable and how much is not.

      The idea is to determine the amount of a withdrawal or payment from an annuity is from the already-taxed principal and how much is considered taxable earnings. Read more

      See page 18 of Publication 575

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