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CHAPTER 6

However, individual annuity contracts these days allow the pay- out of accrued money in different ways. Generally, very few individ- ual annuity contracts are actually taken as life income, or annuitized.

Annuitant—The individual who receives the payout of an annunity

Premium—The amount of money paid to the insurer for the annunity. This can be paid over time or in a single lump sum.

Owner—The individual who enters into an annunity contract with the insurer. This person may differ from the annuitant.

Beneficiary—The person named by the owner who would receive the death benefit from the annuity upon the owner’s death.

TAX TREATMENT FOR ANNUITIES

Annuities are very much like IRAs, in that the money grows tax- deferred, and the annuity owners cannot take any distributions from the contracts until they are at least 591/2 years old. All money invested in an annuity is done so after tax, and there is no tax deduction for investing in an annuity unless it is done inside an IRA annuity. Then, any tax deduction is subject to the same limits that other IRA contri- butions are subject to (i.e., $3000 per year). In most cases, those who take money out of their annuity contracts before they are 591/2 will face a 10-percent IRS penalty for early withdrawal, plus they will be responsible for taxes on the money that was withdrawn. Taxes are paid at ordinary income rates, regardless of how long the annuity has been held.

For nonqualified annuities (those not within an IRA plan), the annuity owner’s investment in the contract is the total premium amount paid, less any nontaxed distributions. Because the contract owner has paid in after-tax dollars, he or she (or the beneficiary, after the owner’s death) is entitled to have this amount back tax-free once distributions from the annuity begin. Therefore, hypothetically, if the

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