From 24/7 Wall St. · David Beren · · 1m 20s
Annuity vs. Brokerage Tax Impact at 85
How $200,000 in an annuity taxes $240,000 growth for heirs vs. brokerage tax-free inheritance.
In brief
How $200,000 in an annuity taxes $240,000 growth for heirs vs. brokerage tax-free inheritance. A 65-year-old's $200,000 annuity passes $240,000 in growth to heirs as taxable income by age 85, while brokerage accounts keep growth tax-free. Originally reported by 24/7 Wall St..
Annuity vs. Brokerage Tax Difference
A 65-year-old with $200,000 in savings faces a choice between a nonqualified deferred annuity and a taxable brokerage account for inheritance.
Growth Projection by Age 85
Assuming 4% annual growth from age 65 to 85, $200,000 becomes $438,225 with $238,225 in growth.
Annuity Heirs Pay Tax on Growth
Annuity growth is taxed as ordinary income to heirs when inherited, with no step-up basis for inherited property.
Tax Impact on Heirs
Heirs pay about $57,174 in federal income tax on $238,225 growth at 24% marginal rate, plus potential net investment income tax.
Brokerage Account Step-Up Basis
Inherited brokerage accounts get a step-up basis equal to fair market value at death, avoiding capital gains tax on growth.
Annuity Avoids Annual Tax Drag
Annuities avoid annual taxes on dividends and gains while brokerage accounts face yearly capital gains tax.
Key Decision for Savers
Savers should sort funds by purpose: annuities for income needs, brokerage accounts for inheritance.
Beneficiary Designations Matter
Review beneficiary designations and death-benefit options now to avoid outdated forms or poor ownership.
The takeaway
A 65-year-old's $200,000 annuity passes $240,000 in growth to heirs as taxable income by age 85, while brokerage accounts keep growth tax-free.
