The Annuity Tax on Lump-Sum vs Annuitized Distributions

If you are setting up a retirement plan, you may be conflicted between the lump-sum and the annuity method of payment. You should be aware that you will have to pay annuity tax. There are benefits to both forms of financial distributions, and before making any definite choices, you should be aware of the different options available to you.

Lump Sum Distributions

If you have chosen to receive the lump sum distributions, then your annuity tax will not include any payment that is part of the cost of the plan. You can receive this portion of your lump sum for free. However, if you choose to receive the payment in cash, you will be taxed as though it were ordinary income.

Annuitized Distributions

If you have an annuitized payout, then you will find that only your accumulated earnings from the distributions are taxed. Like the lump-sum income, this is treated as your earnings, and is taxed accordingly. If the annuity was started after 1986, you will find that any annuity payments that you receive will be taxed.