Military pay will see a 4.6% increase for 2023 compared to 2022 levels, after President Joe Biden signs the new rate into law. These military pay tables apply to active members of the Navy, Marine Corps, Army, Air Force, Coast Guard and Space Force.
The national average BAH rates for service members with and without dependents rose by 12.1% from 2022 to 2023. Because the Defense Department calculates the rates based on a combination of local costs of rent and utilities for various housing types, any fluctuation among those factors in a given location affects BAH rates for that location. The "significant increase" reflected "unique market conditions" in 2022, according to the Defense Department.
BAH rates have been directly tied to the costs of rental housing in local markets since 2008. While BAH rates fluctuate based on the previous year's housing cost averages, individual rate protection prevents your BAH from going down as long as your situation stays the same. If the BAH rate for your location increases Jan. 1, you will receive the increase. If it decreases, you will not normally see any decrease.
Your BAH rate can decrease in only three ways:
Military pay benefits are constantly changing. Make sure you're up-to-date with everything you've earned. Subscribe to Military.com to receive updates on all of your military pay and benefits, delivered directly to your inbox.
“Dark money” refers to spending meant to influence political outcomes where the source of the money is not disclosed. Here’s how dark money makes its way into elections:
Dark money groups have spent roughly $1 billion — mainly on television and online ads and mailers — to influence elections in the decade since the 2010 Citizens United v. FEC Supreme Court ruling that gave rise to politically active nonprofits.
Citizens who are barraged with political messages paid for with money from undisclosed sources may not be able to consider the credibility and possible motives of the wealthy corporate or individual funders behind those messages.
Political jargon can get confusing. What you need to know about spending to influence elections is that there are two main types.
With this kind of spending, donors must be disclosed, contribution limits apply and organizations are allowed to coordinate their efforts to help elect a candidate. This is not dark money. These groups include candidate committees, political parties and traditional Political Action Committees (PAC).
Outside spending — sometimes referred to as independent or non-coordinated spending — refers to political spending made by organizations and individuals other than the candidate campaigns themselves. All outside groups that aren't political parties — except for a few traditional PACs that make independent expenditures — are allowed to accept unlimited sums of money from individuals, corporations or unions. With these donations, groups may engage in a number of direct political activities, including buying advertising that advocates for or against a candidate, going door to door, or running phone banks. However, these organizations are not allowed to coordinate their spending with political candidates or parties. While some outside groups — like super PACs — are required to disclose their donors, others are not. These nondisclosing organizations are referred to as dark money groups.
As the chart below illustrates, dark money groups are growing in size, scope and share of election spending with each election cycle.
Based on data released daily by the FEC. Last update on February 18, 2023.
Whenever money is spent in a political election with the purpose of influencing the decision of a voter and the source of the money is not disclosed, it is dark money. Common types of organizations that can spend in elections while shielding the sources of their money are outlined in greater detail below.
Nonprofit, tax-exempt groups organized under section 501(c) of the Internal Revenue Code may engage in varying amounts of political activity. Because they are not technically political organizations, they are generally not required to disclose their donors to the public. These groups, like super PACs, cannot coordinate spending with political parties or candidates, and therefore are allowed to raise unlimited sums of money from individuals, organizations and corporations.
There are a number of types of 501(c) organizations with different structures, uses and capabilities. None of these organizations are required to publicly disclose the identity of their donors or sources of money though some disclose funding sources voluntarily.
Groups you may know: NAACP, Center for American Progress, Heritage Foundation, Center for Responsive Politics
Groups you may know: National Rifle Association, Planned Parenthood, Majority Forward, One Nation
Groups you may know: Service Employees International Union (SEIU), American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), American Federation of State, County and Municipal Employees (AFSCME)
Groups you may know: US Chamber of Commerce, American Bankers Association, National Association of Realtors
Based on data released daily by the FEC. Last update on February 18, 2023.
Technically known as independent expenditure committees, super PACs may raise and spend an unlimited amount of money and accept contributions from companies, nonprofits, unions and individuals. Since super PACs cannot deliver money directly to candidates, they are exempt from the limits on fundraising and spending that regular PACs must abide by.
Despite the sometimes inaccurate portrayal of them in the media, super PACs must identify all of their donors to the Federal Election Commission (FEC), and thereby to the public. They must do so on a monthly or semiannual basis in non-federal election years and monthly in the year of an election. In that sense, super PACs are quite transparent, except when the donor is a shell corporation or a nonprofit that doesn't disclose its donors.
So-called pop-up super PACs formed shortly before an election may game disclosure deadlines, enabling them to spend unlimited sums influencing races without disclosing their funding sources until after voters go to the polls.
While super PACs are not allowed to coordinate any of their independent expenditures with a candidate's campaign, many single-candidate super PACs are run by individuals who are personally close to a candidate or formerly associated with a campaign.
A hybrid PAC has the ability to operate both as a traditional PAC, contributing funds to a candidate's committee, and as a super PAC that makes independent expenditures. To do so, these committees must have a separate bank account for each purpose. The committee may collect unlimited contributions from almost any source for its independent expenditure account, but may not use those funds for its traditional PAC contributions.
Limited Liability Companies (LLC) perform a number of necessary business functions. However, their unique structure may easily be abused or used in order to hide less than above-board activity. In politics, LLCs are sometimes established to help disguise the identity of a donor or source of money spent on behalf of a political candidate.
LLCs are governed by state law, but generally, minimal information is necessary to file the required articles of incorporation. In states such as Delaware, New Mexico, Nevada and Wyoming, LLCs may be incorporated without even disclosing the names of members or managers.
This lack of accountability and transparency have helped disguise the source of millions of dollars in political spending. Shell companies make major contributions to super PACs each election cycle, leaving voters in the dark while the recipient often knows the donor's true identity.
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Universal basic income (UBI) is a government program in which every adult citizen receives a set amount of money regularly. The goals of a basic income system are to alleviate poverty and replace other need-based social programs that potentially require greater bureaucratic involvement. The idea of universal basic income has gained momentum in the U.S. as automation increasingly replaces workers in manufacturing and other sectors of the economy.
The idea of providing a basic income to all members of society goes back centuries. The 16th century English philosopher and statesman Thomas More mentions the idea in his best-known work, Utopia.
Thomas Paine, a pamphleteer whose ideas helped spur the American Revolution, proposed a tax plan in which revenues would provide a stream of government income “to every person, rich or poor.”
And Martin Luther King, Jr., proposed “guaranteed income” in his book Where Do We Go from Here: Chaos or Community? published in 1967.
While the federal government provides financial support for low-income Americans through the earned income tax credit (EIC), Temporary Assistance for Needy Families (TANF), and other programs, a system of universal income has never taken hold in the United States.
However, the concept has risen to the national consciousness in accurate years. Much of this renewed interest has to do with fundamental changes to the economy—namely, the growth of automation—that threatens to leave many Americans without jobs that pay a subsistence wage.
The American Rescue Plan, signed by President Biden on March 11, 2021, includes generous tax breaks to low- and moderate-income people. For 2021 only, the size of the earned-income tax credit will increase for childless households. The maximum credit amount for childless people increases to $1,502, from $543. The age range has also been expanded. People without children will be able to claim the credit beginning at age 19, instead of 25, except certain full-time students (students between 19 and 24 with at least half a full-time course load are ineligible). The upper age limit, 65, will be eliminated. For single filers, the phaseout percentage (for the credit) is increased to 15.3% and phaseout amounts are increased to $11,610 (the maximum earned income).
A 2019 report by the Brookings Institution, for example, found that one-quarter of all U.S. jobs are susceptible to automation. The researchers argue that roles involving more routine tasks, such as those in manufacturing, transportation, office administration, and food preparation, are most vulnerable.
Supporters of universal basic income believe a guaranteed payment from the government can help ensure that those who are left behind by this economic transformation avoid poverty. Even if government-sourced income isn’t enough to live on, it could theoretically supplement the income from the lower-wage or part-time jobs they are still able to obtain.
Proponents also believe that a universal payment system would make it easier for people to receive assistance who are in need but have trouble qualifying for other government programs. Some Americans seeking disability insurance payments, for example, may lack access to the healthcare system, thereby hindering their ability to verify their impediment.
Many of UBI’s supporters come from the more liberal end of the political spectrum, including former Labor Secretary Robert Reich and past head of the influential Service Employees International Union, Andy Stern.
However, support for a government-supplied income stream has been endorsed by several prominent figures on the right as well.
Among them is the late conservative economist Milton Friedman, who suggested that private charitable contributions aren’t enough to alleviate the financial strain many Americans endure.
In 1962’s Capitalism and Freedom, he argued that a “negative income tax”—essentially a UBI—would help overcome a mindset where citizens aren’t inclined to make sacrifices if they don’t believe others will follow suit. “We might all of us be willing to contribute to the relief of poverty, provided everyone else did,” he wrote.
Libertarian philosopher Charles Murray believes that guaranteed income would also cut government bureaucracy. He has proposed a $10,000-per-year UBI, as well as basic health insurance, which he says would allow the government to cut Social Security and other redistribution programs.
Universal basic income received considerable attention during the first stage of the 2020 presidential campaign after entrepreneur and former Democratic candidate Andrew Yang made the idea a cornerstone of his campaign. Yang’s “Freedom Dividend,” as he called it, would deliver every American over the age of 18 a $1,000 check every month. Those enrolled in federal assistance programs could continue to receive those payments or opt for the Freedom Dividend instead.
Yang contended that the labor force participation rate—that is, the percentage of Americans who were working or looking for work—was at its lowest in decades. “The Freedom Dividend would provide money to cover the basics for Americans while enabling us to look for a better job, start our own business, go back to school, take care of our loved ones or work towards our next opportunity,” his campaign website noted.
Former presidential candidate Andrew Yang’s $1,000-a-month "Freedom Dividend" would cost roughly 50% of the federal government’s projected budget for 2021.
President Biden's American Rescue Plan, signed on March 11, 2021, was a $1.9 trillion pandemic relief package. Its benefits included another round of stimulus payments for every qualified adult in the U.S. This time, the stimulus payments will be in the amount of $1,400 for most recipients. Eligible taxpayers will also receive an identical payment for each of their children. To be eligible, a single taxpayer must have an adjusted gross income of $75,000 or below. For married couples filing jointly, that number has to be $150,000 or below, and for heads of household, adjusted gross income must be $112,500 or below.
Pope Francis, a staunch advocate of the disenfranchised, has framed the issue in moral terms. In an Easter 2020 letter, the pontiff wrote the following of a universal basic wage: “It would ensure and concretely achieve the ideal, at once so human and so Christian, of no worker without rights.”
Despite its promise to curtail poverty and cut red tape, universal basic income still faces an uphill battle. Perhaps the most glaring downside is cost. According to the nonprofit Tax Foundation, Andrew Yang’s $1,000-a-month Freedom Dividend for every adult would cost $2.8 trillion each year (minus any offsets from the consolidation of other programs).
Yang proposed covering that substantial expense, in part, by shrinking the size of other social programs and imposing a 10% value-added tax (VAT) on businesses. He also proposes ending the cap on Social Security payroll taxes and putting in place a tax on carbon emissions that would contribute to his guaranteed income plan.
Whether that set of proposals is enough to fully offset the cost of the Freedom Dividend remains a contentious issue, however. An analysis by the Tax Foundation concluded that Yang’s revenue-generating ideas would only cover about half its total impact on the Treasury.
Among the other criticisms of UBI is the argument that an income stream that’s not reliant on employment would create a disincentive to work. That, too, has been a subject of debate. Yang has suggested that his plan to provide $12,000 a year wouldn’t be enough to live on. Therefore, the vast majority of adults would need to supplement the payment with other income.
Recent studies suggest only a weak link between UBI and joblessness. A 2016 analysis by researchers from MIT and Harvard, for example, found that “cash transfer” programs in the developing world had little recognizable impact on employment behavior.
However, there’s little evidence to suggest that replacing traditional welfare payments with a universal basic income would actually increase employment, as some of its proponents suggest. A accurate two-year experiment in Finland where universal basic income effectively replaced unemployment benefits concluded that UBI recipients were no more likely to find new employment than the control group.
Yes, a 401(k) is usually a qualified retirement plan. So what exactly does that mean?
Qualified retirement plans must satisfy Internal Revenue Service (IRS) requirements for both setup and operations. These requirements are detailed in Internal Revenue Code Section 401(a), which was written into the Internal Revenue Code of 1954. The IRS also provides a breakdown of qualified retirement plan requirements.
Employers are responsible for maintaining assurance of qualified plan authenticity through the IRS’s determination letter program. While 401(k)s are generally set up as qualified retirement plans, they can be disqualified if an employer and any associated affiliates do not comply with qualified plan rules. Some of the main requirements include:
Employers take responsibility for ensuring that a retirement plan they offer meets all of the 401(a) requirements. In general, most defined-benefit plans and defined-contribution plans set up by an employer will be considered qualified.
In a defined-benefit plan, the employer commits to providing a specific payout for employees, regardless of the performance of the employer’s business or investments.
An example of a defined-benefit plan is a pension. A defined-benefit plan puts the majority of the burden for generating the assets due at retirement mainly on the employer. In some defined-benefit plans, employees are not responsible for saving anything. Other plans may require some contributions from the employee. Defined-benefit plans have gotten rarer and rarer, largely because they are expensive and complex for the employer.
Defined-benefit plans are managed collectively by the employer, who usually appoints a board of trustees to oversee the asset management. The board manages the allocations of an entire portfolio. Board members and consultants work comprehensively to determine standard parameters for ensuring that the portfolio will have the funds it needs to payout according to the terms it has promised. Board members choose asset allocations based on the needs and risk management of the portfolio.
In a defined-contribution plan, the onus is upon the employee to contribute enough to the retirement plan to ensure sufficient assets at retirement, a much more attractive option for employers.
The most common defined-contribution plans are the 401(k) in the private sector and the 403(b) in the public sector. Most defined-contribution plans will offer matching benefits. This gives the employee additional funding in the plan if they enroll. An employer will match the contributions of the employee up to a certain limit, usually a percentage of the employee’s pay.
A 401(k) is a popular type of defined-contribution plan. The employer is not responsible for managing a collective pool of assets that will be paid out to employees. However, the employer does have the authority to choose which types of investments it will allow in its plans. These investment options will usually span the risk spectrum from money market investments to all kinds of mutual funds, exchange-traded funds (ETFs), and more. The investment options in a 401(k) plan are usually dependent on the partners that the employer has access to or chooses to work with.
In general, any employer-sponsored retirement plan that meets the requirements of Internal Revenue Code 401(a) can be considered a qualified plan. Some alternative types of qualified plans can include:
Non-qualified plans are any other type of employer-sponsored plan that does meet all of the requirements of 401(a). Non-qualified plans can be easier to set up for some employers. Non-qualified plan investments are made with after-tax dollars. Therefore, these plans do not enjoy the benefit of a tax shelter. However, most non-qualified plans do have shorter liquidity terms.
In general, employers have the greatest need for awareness when it comes to qualified plans. Employers are responsible for obtaining qualified plan status, setting up appropriate procedures, ensuring that operational procedures are consistently maintained, and auditing plans annually for compliance.
One of the most important requirements for a qualified plan is non-discrimination. This means a qualified plan must be offered to all employees equally, regardless of their status within the company.
Employers have several advantages for the company if they offer a qualified plan. Any contributions to a qualified plan are tax-deductible. Businesses with 100 or fewer employees can get a tax credit. Lastly, qualified plans are an important benefit that helps companies attract talent to their organization.
Withdrawals from a qualified retirement plan before you are 59½ generally incur a 10% early withdrawal penalty and are subject to income tax at the current annual rate.
Employees don’t necessarily have any special obligations when it comes to qualified plans. Some employees may not even know the difference between a qualified and non-qualified plan. However, there are several distinctions that an employee will need to be aware of for their own sake.
Qualified plans are considered to be a tax shelter. This means employees contribute to the plan with pre-tax dollars that are not taxed immediately but rather sheltered until some time in the future when they are withdrawn. Pre-tax payroll contributions lower the amount of take-home pay an employee receives in each paycheck, which also results in a lower amount of tax withheld. Some employers may allow for short-term loans from a 401(k) with regular payments and low interest paid back to the account, which can be an efficient way to borrow.
Investors in a 401(k) or other type of qualified plan can choose to invest in any of the investment products the plan offers. Funds in a qualified account cannot be withdrawn penalty-free until age 59½. Any funds withdrawn prior to 59½ are subject to income tax and a 10% penalty unless exceptions apply. One exception includes payments for the birth or adoption of a child.
After age 59½, account investors can withdraw funds at their annual tax rate with no penalties. Qualified retirement plans must make required minimum distributions (RMDs) from the account at the age of 72. Employers and account holders are penalized if RMDs are not made.
The IRS has annual contribution limits for both qualified and non-qualified plans. In 2023, the following contribution limits apply for a 401(k):
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Investing is a fantastic way to build wealth and security, but it’s also a fantastic way to create a hefty bill if you don’t understand how and when the IRS imposes taxes on investments.
Here are five common types of taxes on investments and what you can do to minimize what you owe.
What it is: Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income.
How it works: The money you make on the sale of any of these items is your capital gain. For example, if you sold a stock for a $10,000 profit this year, you may have to pay capital gains tax on the gain. The rate you pay depends in part on how long you held the asset before selling. The tax rate on capital gains for most assets held for more than one year is 0%, 15% or 20%. Capital gains taxes on most assets held for less than a year correspond to ordinary income tax rates.
How to minimize it: You can reduce capital gains taxes on investments by using losses to offset gains. This is called tax-loss harvesting. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.
What it is: Dividends usually are taxable income in the year they’re received. Even if you didn’t receive a dividend in cash — let’s say you automatically reinvested yours to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it.
How it works: There are generally two kinds of dividends: nonqualified and qualified. The tax rate on nonqualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower: It’s 0%, 15% or 20%, depending on your taxable income and filing status. After the end of the year, you’ll receive a Form 1099-DIV or a Schedule K-1 from your broker or any entity that sent you at least $10 in dividends and other distributions. The 1099-DIV indicates what you were paid and whether the dividends were qualified or nonqualified.
How to minimize it: Holding investments for a certain period of time can qualify their dividends for a lower tax rate. Remembering to set cash aside for the taxes on dividend payments can help avoid a cash crunch when the tax bill arrives, but holding dividend-paying investments inside of a retirement account can be a way to defer taxes on investments.
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What it is: Generally, you don’t pay taxes on money you put into a traditional 401(k), and while the money is in the account you pay no taxes on investment gains, interest or dividends. Taxes hit only when you make a withdrawal. With a Roth 401(k), you pay the taxes upfront, but then your qualified distributions in retirement are not taxable.
How it works: For traditional 401(k)s, the money you withdraw is taxable as regular income — like income from a job — in the year you take the distribution. If you withdraw money from a traditional 401(k) before age 59½, you may have to pay a 10% penalty on top of the taxes (unless you qualify for one of the exceptions). You may also have to pay a penalty if you wait too long to make withdrawals (after age 72). (Note: The age limit used to be 70½, and that limit still applies to anyone who turned that age in 2019.)
See more about how traditional 401(k)s and Roth 401(k)s compare
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Tax treatment of contributions |
Contributions are made pre-tax, which reduces your current adjusted gross income. |
Contributions are made after taxes, with no effect on current adjusted gross income. Employer matching dollars must go into a pre-tax account and are taxed when distributed. |
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Tax treatment of withdrawals |
Distributions in retirement are taxed as ordinary income. |
No taxes on qualified distributions in retirement. |
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Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59½, unless you meet one of the IRS exceptions. |
Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is:
Unlike a Roth IRA, you cannot withdraw contributions any time you choose. |
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How to minimize it: If you have to take money out of the account before you’re 59½, see if you qualify for an exception to the penalty. Tax-loss harvesting, borrowing from the account rather than withdrawing, and rolling over the account are also ways to minimize taxes on investments.
What it is: Mutual fund taxes typically include taxes on dividends and capital gains while you own the fund shares, as well as capital gains taxes when you sell the fund shares.
How it works: Your mutual fund may generate and distribute dividends, interest or capital gains from the investments inside the fund. Accordingly, you may owe taxes on these investments — even if you haven’t sold any of the shares or received any cash from them. The tax rate you pay depends on the type of distribution you get from the mutual fund, as well as other factors. If you sell your mutual fund shares for a profit, you might incur capital gains tax.
How to minimize it: Waiting at least a year to sell your shares could lower your capital gains tax rate. Holding mutual fund shares inside a retirement account could defer the tax on the interest, dividends or gains your mutual fund distributes. Tax-loss harvesting and choosing funds less likely to distribute taxable income are other options.
What it is: If you sell your home for a profit, some of the gain could be taxable.
How it works: The IRS typically allows you to exclude up to $250,000 of capital gains on your primary residence if you’re single and $500,000 if you’re married and filing jointly. Say you and your spouse bought a home 10 years ago for $200,000 and sold it today for $800,000. If you file your taxes jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be). What rate you pay on the other $100,000 would depend in part on your income and your tax-filing status.
How to minimize it: You have to meet certain criteria in order to qualify for this exclusion, so be sure to review them before you sell. You might qualify for an exception, and adding the value of home improvements you’ve made could help.
Someone who inherits a non-qualified annuity will only have to pay income taxes on any earnings from the annuity when they are withdrawn. Inheriting a qualified annuity, on the other hand, means owing taxes on any withdrawals from the annuity, including principal and interest. The difference stems from the way the two types of annuities are funded. Qualified annuities are funded with pre-tax dollars, while non-qualified annuities are funded with after-tax dollars. This difference affects many aspects of how the two types of annuities can be used for retirement planning.
A financial advisor can help you handle an inherited annuity, whether it’s qualified or not. Find an advisor now.
Annuity Basics
Annuities are contracts between insurance companies and individuals that are often used in funding retirement. In return for a hefty payment from the individual, also known as the premium, the insurance company promises to make payments on a monthly or other regular basis.
The payments from an annuity can start immediately or at a set future date. They may last for a fixed number of years or for the annuity buyer’s lifetime. Lifetime annuities can provide retirees with guaranteed income, no matter how long the retiree lives.
The terms of an annuity typically call for payments to end when the owner dies. However, provision can be made for a remaining balance to be passed to someone else. This lets the owner designate someone to inherit the remaining annuity payments.
There are many types of annuities. Some provide fixed returns, while returns on others may vary according to stock market indexes or other benchmarks. One important way they can be divided is by whether they are qualified or non-qualified.
Comparing Qualified and Non-Qualified Annuities
Qualified annuities are funded with pre-tax dollars, similar to contributions to IRAs or 401(k) plans. Any withdrawal from a qualified annuity is taxed at the owner’s individual rate in effect at the time of the withdrawal. The IRS limits the annual amount that can be put into a qualified annuity. And, like other tax-advantages retirement vehicles, owners of qualified annuities have to take required minimum distribution (RMD) withdrawals starting at age 70.5.
Non-qualified annuities are funded with money that has already been taxed. Instead of paying taxes on all withdrawals from the annuity, owners pay taxes only on the earnings. Since the money used to pay the principal or premium has already been taxed, it can be withdrawn later tax-free. The IRS doesn’t limit contributions, although the insurance company may place a cap on the size of the contribution, which is also called the premium.
Instead of paying taxes on all withdrawals from a non-qualified annuity, owners pay taxes only when withdrawing the earnings. Since the principal or premium has already been taxed, it can be withdrawn later tax-free. Also, non-qualified annuities don’t have to make RMDs.
Non-qualified annuities are similar to Roth IRAs. For instance, both types of retirement planning vehicles are funded with money that has already been taxed. Also, there are no RMDs on either Roths or non-qualified annuities. One difference is that when a Roth IRA holder withdraws from the account, any earnings are not taxed at the recipient’s regular rate. Earnings are taxed like normal income when withdrawn from a non-qualified annuity.
Taxing Inherited Non-Qualified Annuities
Someone who inherits a non-qualified annuity will have to pay taxes on withdrawals of the earnings but not the principal, just like the original owner would. This also applies to penalties on early withdrawals from the annuity.
If you withdraw money from an annuity before age 59.5, the IRS charges a 10% early withdrawal penalty. However, this penalty is only levied on early withdrawals of earnings on a non-qualified annuity, while a qualified annuity holder pays the 10% penalty on any withdrawals.
The IRS uses a formula to determine what part of a withdrawal is taxable earnings or tax-free principal. This is called the exclusion ratio. It’s based on the relationship between the initial premium and the total estimated payout of the annuity.
The exclusion ratio formula divides the initial premium by the total estimated payout. For instance, if you buy a $50,000 annuity that is expected to pay $100,000 over the life of the annuity, the exclusion ratio is $50,000 divided by $100,000 or 50%. This means that 50% of the monthly payout from the annuity would be taxed as earnings and 50% would be untaxed.
Bottom Line
Inheritors of non-qualified annuities purchased with pre-tax funds must pay income taxes only on the earnings when making withdrawals from the annuity. The initial principal used to purchase the annuity has already been taxed, so those withdrawals are tax free. Inheritors of qualified annuities have to pay income taxes at their normal rate on all withdrawals, including both principal and any earnings. The IRS uses the exclusion ratio to determine which portions of a withdrawal consist of taxable earnings or non-taxable principal.
Tips on Annuities
Choosing an annuity requires carefully considering taxes, retirement needs and overall financial goals. That’s where a financial advisor can be valuable. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
Don’t forget to integrate Social Security payments into your retirement plans. While they may not have a monumental effect on your finances in retirement, they can provide you with some extra cash at a time when you’ll need it most. To gain some insight into what you can expect from this government program, take a look at SmartAsset’s Social Security calculator.
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The post What Is an Inherited Non-Qualified Annuity? appeared first on SmartAsset Blog.
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This virtual workshop will explore the basics of ChatGPT and its potential effects on higher education. We will share an overview of the technology, a few demonstrations of capabilities and examples of the effects seen so far at Princeton. We will discuss examples from library services and share suggestions for working with the tool in classroom contexts. We will preview a workshop series planned to explore AI tools in the months ahead. Presented by library staff. Bring your questions and ideas!
