Thursday, November 27, 2014

Investment

 

Interest income, dividend income and capital gains inside of after-tax accounts.

Interest, dividends and capital gains that occur within tax-deferred accounts, such as IRAs, 401k plans or variable annuities, are not taxable in the year they occur. Instead, all gains are deferred and you only pay tax when you take a withdrawal.

 

Withdrawals from an annuity.

When you take withdrawals from a fixed or variable annuity (one that is not owned by an IRA or retirement account) the IRS rules say any gain must be withdrawn first, and this gain is taxed as ordinary income. Once all gain has been withdrawn, you would be withdrawing your basis, or principal. Withdrawals of basis are not counted as taxable retirement income.

 

Income from an immediate annuity which was purchased with after-tax money.

If the immediate annuity was purchased with pre-tax money, such as in an IRA or retirement account, all of the income will be taxable.

 

Proceeds from cashing in a cash value life insurance policy.

Any portion attributed to gain will be taxable. Your basis (usually the total of all your premiums paid) is not taxable retirement income to you.

 

Interest income from municipal bonds.

Most municipal bond income is free from federal income taxes, but you may be subject to state income taxes on this form of retirement income.

 

Loans from life insurance policies.

After you take a loan from a life insurance policy if you terminate the policy before repaying the loan, at that time a portion of the loan amount may become taxable income to you.

 

Income from a reverse mortgage.

 

After-tax contributions withdrawn from a 401k or other employer sponsored plan.

 

Any income which is a return of your own principal or cost basis.

For example, suppose you purchased a variable annuity with $10,000 of after-tax money. You cash it in at age 60 when it is worth $12,000. The $2,000 of gain is taxed as ordinary income. The $10,000 is your cost basis, or original principal, and is not taxable income to you.

 

Gain from the sale of your home.

If gain is less than $250,000 for a single, or less than $500,000 for married filers, you have lived in home for at least two of last five years and met other IRS requirements.


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