Smart annuity planning can benefit long-term tax planning

Taxes shape almost every retirement decision Americans make.

They can influence how savings grow, how income flows and how long a portfolio can support someone's lifestyle. Financial professionals who can translate tax complexity into clear guidance bring real value to the individuals sitting across the table.

Demand for protected growth and predictable income continues to rise. LIMRA reports that U.S. retail annuity sales reached $461.3 billion in 2025, marking the fourth straight year of record growth. Indexed products now represent 45% of total annuity sales, reflecting a shift toward solutions that combine protection with long-term planning flexibility.

Growth like this creates opportunity for financial professionals who position annuities within a broader retirement strategy rather than a product-only conversation. But that responsibility goes beyond product knowledge. Financial professionals also carry an ethical obligation to explain how these solutions work, where they fit, and where they don't.

Start with the tax structure

Annuities often enter the conversation because of their tax advantages, but structure should come first.

Nonqualified annuities allow earnings to grow tax-deferred, without the annual contribution limits of many retirement accounts. For higher-income households that have already filled their qualified buckets, that feature can open additional opportunities.

Tax deferral doesn't eliminate taxes. It changes the timing.

Retirement income planning becomes especially important as individuals approach required minimum distributions. Under current IRS rules, RMDs from traditional individual retirement accounts and many employer plans generally begin at age 73 and are typically taxable.

Once RMDs begin, income streams can stack up quickly. A retiree who withdraws from multiple accounts during the same year may find themselves in a higher tax bracket than expected.

In my experience, many people don't see that coming. They've spent decades focused on accumulation. Distribution strategy often becomes an afterthought until the first tax bill arrives.

Clearing up common misconceptions

Annuity taxation may seem complicated because people assume all retirement accounts work the same way. Clear explanations help consumers avoid misunderstandings and ensure annuities are used appropriately within a retirement strategy.

Qualified annuities follow the tax rules of the retirement account that holds them and are subject to an additional 10% tax if withdrawn before age 59 ½. Distributions generally count as ordinary income and remain subject to RMD rules.

Nonqualified annuities work differently. Individuals fund them with after-tax dollars, so the earnings portion of withdrawals is treated as income, while the principal portion is not. Those distinctions shape how retirement income fits together.

Social Security provides another example. Federal rules allow up to 85% of Social Security benefits to become taxable depending on a retiree's combined income, which means withdrawals from other assets can quietly raise a household's tax bill.

One pattern keeps showing up in conversations I've had with financial professionals across the country. Many people are surprised by how interconnected these income streams become once retirement begins.

Turn tax awareness into a strategy

Tax conversations provide a natural entry point for deeper income-planning discussions. Financial professionals can help those they serve look beyond the current tax return and focus on the long-term structure of retirement income.

A few questions often open the door to stronger conversations:

• How will different income sources interact once RMDs begin?
• Could tax-deferred growth reduce annual tax drag over the next 15 or 20 years?
• How might withdrawals affect the taxation of Social Security benefits?
• Which assets should come first when building a retirement income stream?

These questions shift the discussion away from products and toward strategy.

Recent policy discussions show how retirement options continue to evolve. Proposed legislation would allow workers age 50 and older to roll a portion of their 401(k) savings into annuity income streams. The goal is to help Americans convert retirement savings into dependable income while simplifying rollover decisions.

As options expand, financial professionals play a larger role in helping people understand the tradeoffs.

Leadership through clarity

The annuity market continues to grow because the client issues behind it are real. People worry about longevity risk, market volatility and whether their savings will support the life they've worked to build.

Financial professionals who explain tax mechanics clearly bring confidence into that conversation.

I believe people appreciate the financial professionals who helped them understand the big picture. They remember the one who connected taxes, income timing and long-term security into a strategy they could follow. Financial professionals who lead with education, transparency and strategic thinking build stronger relationships and stronger businesses.

Sales numbers may grab headlines, but the real differentiator in this industry is ethical guidance.

Help people understand how taxes affect retirement income, and you do more than sell a product. You help them build a future they can look forward to.

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Alan Roman is the director of product and advanced strategies at TruChoice Financial, an AmeriLife company. Contact him at [email protected].