I'm an Annuities Expert: Here Are Two Ways to Use Annuities to Benefit From the OBBB

The One Big Beautiful Bill (OBBB) gives most people 65 and older a new deduction on their federal income taxes starting in 2025.

But to get the full or partial amount, you can't exceed the income limits. For some older adults, it can thus make sense to reduce their taxable income to get under the limit.

Through 2028, eligible taxpayers 65 and older can get an additional $6,000 deduction (or $12,000 for a married couple if both spouses are 65). This is in addition to the standard deduction for all taxpayers and the extra deduction for older adults.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

The full deduction applies to individuals with a modified adjusted gross income (MAGI) up to $75,000 and joint filers with MAGI up to $150,000. The deduction is reduced by 6 cents for every dollar above the threshold.

For couples filing jointly, the deduction is fully phased out at $250,000. For single taxpayers, the deduction fully phases out with MAGI above $175,000.

For older people with lower or moderate incomes, the new deduction will help in two ways. First, it's an additional deduction that will benefit the majority of older adults who do not itemize their deductions.

Second, for those whose income is low enough, it will help reduce the tax on their Social Security benefits, in some cases to zero.

How Social Security benefits are taxed and why it matters

The percentage of your Social Security benefits that are taxed is determined by your "combined income." To calculate it, add up your adjusted gross income (AGI), tax-free interest from municipal bonds if any, and 50% of your Social Security benefits.

Married couples with less than $32,000 of combined income pay no income tax on their benefits. Couples earning between $32,000 and $44,000 have up to 50% of their Social Security benefits subject to federal income tax.

Those making more than $44,000 pay income tax on up to 85% of their benefits. For singles, the thresholds are $25,000 and $34,000.

The new deduction can lower your taxable income and thus your combined income. It's estimated that 90% of older adults will now pay no federal income tax on their Social Security benefits. Some other older adults will still pay the tax but at a lower rate.

Reduce taxable income with a nonqualified deferred annuity

If you're on the threshold of being able to benefit from the new deduction for older people, consider ways to reduce your taxable income to become eligible.

There are many ways to do that, but buying one or more deferred annuities is a straightforward, dependable method that has other benefits. As we'll see, this strategy can be used for both "nonqualified" money and IRAs.

A nonqualified deferred annuity is one that's held in a nonqualified account instead of a qualified account, such as an IRA, Roth IRA or 401(k). Nonqualified variable, fixed, fixed index and deferred income annuities can all help reduce current income and taxes.

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As long as you don't withdraw any interest or gains from an annuity, you won't be taxed on it. You can defer taking out interest as long as you like.

Here's an example. Let's say you have $150,000 in funds to invest, and you want to put them in a guaranteed account. You could buy a bank certificate of deposit (CD). As of early August, the top rate for a five-year CD was 5.5%, meaning it would produce $8,250 of taxable income each year.

If you don't need that income for living expenses, you could place the $150,000 in a five-year multi-year guaranteed annuity (MYGA) instead. That would reduce your taxable income by $8,250 in 2026 compared to the CD.

Additionally, such a product, which acts much like a tax-deferred CD, produces more interest income because you could get up to 5.85% on your money and earn $8,775, tax-deferred.

Let's say this is a couple whose "combined income" would be $158,250 if they bought the CD. Since they're over the income limit, they'd get a partial reduction of the new credit for older people.

In contrast, the annuity would bring their income down to $150,000, and they'd get the full $12,000 deduction as well as reducing other federal and state income taxes.

In this way, a couple or an individual with a more modest income might be able to use an annuity to cut their income so they'd be eligible for the full deduction for older people, which would reduce their combined income so that they'd potentially pay no tax on their Social Security benefits.

An annuity that defers RMDs and cuts taxes

Everyone must start taking taxable required minimum distributions (RMDs) from their IRA, 401(k) plan or other qualified retirement plan when they reach age 73.

The only feasible way to defer some RMDs is to transfer a portion of your retirement-plan assets to a qualified longevity annuity contract (QLAC). The money in one is excluded from plan assets on which RMDs are calculated.

A QLAC is a special lifetime deferred income annuity that meets IRS requirements. It lets you keep more of your retirement plan intact and tax-deferred longer.

You can place up to $210,000 in one or more of them. You must start taking taxable income payments from a QLAC at 85, but you may begin sooner.

To purchase a QLAC, you transfer funds from your IRA or 401(k) or other eligible retirement plan to a life insurer. This single premium funds the QLAC. Since the transfer is from one plan custodian to another, it's tax-free.

Suppose you place $150,000 in a QLAC at age 73 and defer payments until age 80. That $150,000 is now removed from your annual RMD calculation. By reducing your current RMD income, you might be able to get all or a greater portion of the temporary credit for older people.

If you need your entire RMDs to cover expenses, you won't be able to use this plan. But you can buy a QLAC with as little as $10,000.

The other big advantage of the QLAC is that it's a lifetime annuity that guarantees a level income as long as you live. You can choose an individual or a joint lifetime payout, with the latter paying out income until the second spouse dies. The joint payee must be a spouse.

The additional deduction for older people is scheduled to end after the 2028 tax year, so it can be a good move for certain people to defer some income for the current tax year and the next three.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-rider quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

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