Paying tax can be a burden to most people and investors. They think that instead of saving something for their own selves and businesses, some of their money are eaten up by taxes. Some of the people do not think highly of annuities too because they think that the principal they pay will not be fully returned to them in time. Well, the good news is, these down sides have silver lining. You can have a break paying tax in immediate annuities. Your money can be stacked in your account as your investment and for a time invisible for taxes. It will only be taxable when the withdrawal times occur. And even so, not all of it is taxable.

Let us break down the source of funds of immediate annuity into two – the qualified immediate annuity and the non-qualified immediate annuity. Qualified refers to the premium amount that are still qualified for the IRS exemption from income taxes. Non-qualified, on the other hand, is the one that have been purchased with the taxes being paid already. A part of the income is excluded from tax.

When you purchase a non-qualified immediate annuity, the amount paid to you is composed of two divisions. These are the principal and the interest. The principal is the one excluded from tax because it is a return of your initial investment. The interest is the one that taxed as an income.

Although annuities like immediate annuities present a tax break in your income, you should also be aware of some tax issues before buying immediate annuity quotes. Annuities start paying an annuitant after his or her retirement. If you happen to withdraw before the age of 59 1/2, you will receive a 10% penalty from the Internal Revenue Services (IRS). This penalty will be taken from the gain of the annuitant’s contract. It is a waste of money. Instead of avoiding tax, you end up paying more for it.

Also, if you get your income from a tax-qualified retirement plans like IRA and 401 (k), the benefits of being tax-deferred will not be enjoyed by you fully. You will not be gaining additional tax benefits aside from the benefits you are receiving from those plans. Tax-qualified retirement plans like these differ from immediate annuities in many ways like in the case of distributions, deductions, charges and death benefits.

The taxation of immediate annuities and any other annuities depends on the tax status of the money you use to buy an annuity. If it is taxable, then the income you will be receiving will be taxable too. If it is not, then a part of your income may be deferred from taxes.

When you ask an insurance company or any salesperson or agent for immediate annuity quotes, a statement of about the percentage of what is tax-free is indicated. You should really be critical about this since this will be the percentage of tax you will be dealing with if ever you choose to buy that kind of annuity they are advertising. When there is an opportunity to have a break from paying taxes, you might probably grab it immediately. There is nothing wrong with that as long as you take the right measure of precautions first.