Fixed annuities can often cause people a fair amount of stress when they try and determine the tax treatment. And even though this process can seem a bit too much to handle, the underlying concepts are actually quite simplistic. A fixed annuity is a contract with the insurance company in which you make premium payments and they agree to provide you a fixed income for specified number of years.

One of the most beneficial aspects of the fixed income annuity is the fact that you may receive payments out of the annuity for the span of the contract or the lifetime of the annuitant. These life annuities can provide a guaranteed income throughout the whole duration of your retirement.

The basic tax treatment of fixed income annuities can be considered relatively simple, whereas as with most other tax questions, the details can get rather complicated. Most annuities enjoy tax-deferred growth, and are only taxable upon distribution.

This means that any growth inside of the account during the accumulation and distribution are not taxable until the money is taken out. Needless to say, tax deferred growth can be a significant boost to the overall value of the account.

Every annuity payment is separated into two categories, nontaxable and taxable. To determine the taxable portion of the annuity distribution, you must first calculate the exclusion ratio. The exclusion ratio is calculated by dividing the investment amount in the annuity by the total amount expected to be received through payments. Each prospective distribution is then multiplied by the ratio to determine the taxable portions.

In a broad sense, the non-taxable portion of the account is the dollars that were paid for by premiums paid into the annuity. The taxable portion deals with the growth of the account and any distributions that exceed the total paid in.

Fixed period annuities are normally much easier to calculate the taxes on than are life annuities. The life annuity contracts must use a special table by the U.S. Treasury to determine the life expectancy of the annuitant.

Despite the various disadvantages that fixed annuity contracts have, this type of insurance product can be a very effective retirement planning tool. The lifetime income and ability to preserve capital for the duration of your retirement is a very appealing feature of the product. Add in the various tax advantages, and the fixed annuity can be a quite useful financial planning tool.

Be sure to check out Brian Atkinson at The Fixed Annuity Guide to learn more financial planning topics. The fixed deferred annuity can be used in a multitude of creative and powerful ways.

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