- Annuities are retirement savings vehicles designed to offer investors an advantageous method of accumulating money for the future. Annuity products are created and managed by life insurance companies, and are available in a variety of categories, each with its own pros and cons. Money deposited into an annuity accumulates without income tax liability until the year in which it is withdrawn, allowing owners to benefit from having more money invested than if taxes were due each year.
- A qualified annuity is one containing money that has not yet been taxed. Annuities within company-sponsored retirement plans or IRAs contain qualified funds because each contribution results in a dollar-for-dollar tax deduction. When you retire and begin taking distributions from qualified annuities, your New Jersey state income tax liability increases. The total aggregate sum withdrawn from a qualified annuity is added to your taxable income for the year, increasing your tax liability and potentially even elevating you to the next tax bracket.
- Non-qualified annuities operate identically to qualified contracts, with the only difference being the future income tax ramifications of withdrawals from the account. Annuities purchased with ordinary savings, money that has already been taxed, are identified as non-qualified. Contributions into these accounts do not result in any deductions on your New Jersey income tax return. However, any growth in the account remains untaxed until it is withdrawn. Since taxes were already paid on the original contributions, New Jersey state income tax liability is limited to the portion of the account in excess of the aggregate deposits. When withdrawn, the aggregate amount of the distributions that is considered the growth, as opposed to a return of the original deposit, gets added to the owner's taxable income for the year.
- New Jersey residents receiving annuity distributions have the option of instructing the insurance carrier maintaining the annuity account to withhold a percentage of each payment in anticipation of the additional income taxes due on the money. However, some retirees filing New Jersey state income tax returns may qualify for a retirement income tax exclusion if their total gross income is less than $100,000. Eligible residents whose tax status is married and filing jointly can exclude a maximum of $20,000 of retirement income. If the annuitant's tax filing status is single, $15,000 may be excluded. Married couples filing separate returns may exclude up to $10,000.