What You Need to Know About Annuities in California

Annuities in California may have some different provisions than they do in other states. California charges a state premium tax on annuities, charges extra tax penalties on early withdrawals, and may have additional taxes on distributions.

California has the largest insurance market of any US state and insurers in California offer a wide variety of life insurance policies and annuity products. California also has some of the strictest consumer protection laws to protect buyers of life and annuity products.

You could say that California residents are some of the most well-protected insurance consumers in the country.

On the downside, California also has a number of extra taxes that can mean your annuity doesn’t grow as quickly or pay out as much as it might in another state.

In this article, you’ll learn everything you need to know about buying annuities in the Golden State — how taxes work, extra laws, and how Californians can buy an annuity.

How Does California Tax Annuities?

Annuities pretty much work the same way everywhere, but some states have different rules about how some of the key features of annuities are regulated. This means the treatment of annuities in a state like North Dakota could be different than the way they're treated in one like California.

California, in particular, has a number of extra rules around annuity taxation that are important to consider.

State Premium Tax

One of the main differences between California and the rest of the country is that the state has a specific premium tax — a sales tax assessed on insurance premiums — that applies to annuities. This tax is charged to the insurance company and can be passed along to the annuity owner. For immediate annuities, you would pay this upfront, which means it is deducted from your initial contract value. If you choose a deferred annuity, this sum could be deducted from the first payment you receive.

The amount of the tax depends on the type of annuity you purchase. For non-qualified annuities, the premium tax is 2.35%, whereas it’s just 0.5% for qualified annuities. Remember, a non-qualified annuity is one you purchase with after-tax dollars while a qualified annuity is one you purchase with funds that have never been taxed.

That’s fairly high compared to the rest of the country. California is one of just six states, plus Puerto Rico, that charge insurance companies this tax. Wyoming and Florida charge just 1% while Nevada has one of the highest rates in the country with 3.5%.

Tax Penalties on Early Withdrawals

Note that you can face additional tax penalties if you take early withdrawals. The IRS charges a federal 10% tax penalty on early withdrawals from retirement plans before you turn 59½. California levies an additional 2.5% penalty when you take money out of an annuity or other retirement plan before turning 59½.

Tax on Distributions

Finally, like all annuities, California residents pay ordinary state income taxes on distributions from annuities in the year they receive those distributions. Those state income taxes range from 1% to 13.3%, depending on your income.

Other Taxes

California does not tax Social Security benefits. It also does not levy estate or inheritance taxes, which could be relevant to individuals who inherit an annuity.

If you’re ever in doubt about how to optimize the tax burden of your retirement plan in California, we recommend contacting a tax advisor in that state.

Annuity Laws in California

Like every state, California has its own Department of Insurance, which is responsible for monitoring licensed annuity providers and ensuring consumers are protected from annuity scams.

The Department of Insurance, together with the Assembly Budget Committee, helped develop a modern and comprehensive law called the Annuity Adequacy Bill or AB 689, which protects insurance consumers. Among its many provisions, the law requires insurers to evaluate a number of factors to ensure that the insurance sale is appropriate, including the consumer’s income, age, and financial objectives.

In addition, Senate Bill 620 further created a number of restrictions to further protect consumers over age 65. This included restricting advertising practices, ensuring that there are proper disclosures when an agent presents in a client’s home, and restricting how commissions work. This law was one of the reasons that California became the first state to require annuity training for advisors.

Here’s one last critical fact about annuities in California. Annuities purchased in California are protected by California law, even if you move to a state with different rules after purchase.

Annuities are Protected from Creditors Up to a Certain Amount

California’s annuity laws include rules that protect consumers from potential creditors.

Imagine you have debt because you borrowed money. The person who lent the money to you is a creditor. And imagine there is a court case where a judge directs you to pay back your debt to the creditor, say, a collection agency or a bank. That creditor is normally permitted to pursue your assets until the debt is paid off. That could mean taking your savings, your car, or a number of other assets.

But in California, annuities are protected from creditors:

• Unmatured annuities — those that haven’t been annuitized — are exempt from creditors without a claim up to $13,975. If you have a spouse, they also are entitled to an exemption of $13,975, and the values can be combined.
• Annuities that have been annuitized are exempt to the extent reasonably necessary to support the debtor (but additional money could become available for creditors to claim). In other words, California lets you keep enough retirement savings to live on, although they keep the exact amount vague.

These exemption rules help you feel secure that you can keep your retirement savings intact during the term of your annuity policy, even if a court determines you owe money to others.

Buying an Annuity in California

Annuities can be a powerful way to build up your retirement savings nest egg. They offer three big main benefits to retirees:

• Lifetime income. You select an annuity payout option where you receive regular income for the rest of your life.
• Tax advantages. Annuities grow tax-deferred, helping your savings grow faster.
• Steady growth. Low-risk fixed annuities provide guaranteed growth at solid interest rates.

Those features make them extremely attractive to many people looking to shore up their retirement plan, but anyone considering buying an annuity in California should make sure they think through their decision. Here are some steps you can take as you scrutinize an annuity product.

• Consider your goals. If you’re looking for long-term, steady growth for retirement, annuities are a good potential option. If you’re looking for a short-term savings vehicle or want high-risk, high-growth products, you might want to consider a different savings option.

• Find the best annuity for your needs. If you decide to go with an annuity, look for the type of annuity that’s the right fit for your needs. While most annuities operate using the same principles, you can choose different features so that yours is optimized for your circumstances and goals. If you want guaranteed growth at a fixed rate, you can choose a fixed annuity. If you want more risk with a chance to lose money, you can consider a variable annuity.

• Verify policy specifics with the company. Once you’ve found an annuity that suits your needs, check in with the annuity company to verify the details — the contract term, the interest crediting rate, the free-look window, and so on. You’ll also want to make sure you’ve got the extra bells and whistles you need, like income riders and death benefits.

• Review the expected return. At this point, you might want to know how much your annuity would be worth in the future. Use this guide to calculate the future value of your annuity and estimate your future earnings.

• Understand the contract terms. The annuity contract document will specify all the rules you need to understand how your annuity will work; for example, if you would need to pay fees for early withdrawals. Read through these to make sure you understand them.

• Research the annuity credit rating. Annuities provide guaranteed lifetime income, but that guarantee rests on the financial strength of the annuity company you choose. If the company goes bankrupt, you could lose your investment. Select an annuity company with a long history of strong financial performance that’s unlikely to fail.

The above steps can help you properly evaluate the contract and make a decision about whether to purchase or not. If you need help, consider consulting a financial advisor.

What Kind of Annuities are Available in California?

California is one of the biggest insurance markets in the country, so there’s a lot of choice when it comes to annuities. Here are some of the most common annuity options available:

• Immediate annuities. A type of annuity that starts to pay you back soon after you buy it.
• Deferred annuities. A type of annuity that accumulates in value and can be converted into regular income years in the future.
• Fixed Annuities. A kind of deferred annuity that has a fixed minimum interest rate, so you’re guaranteed a steady return on your money.
• Variable Annuities. A kind of deferred annuity that has a variable interest rate tied to investments.
• Fixed Index Annuities. A kind of deferred annuity that has characteristics of both fixed and variable annuities.

California Fixed Annuity Rates in California

One of the most important factors when choosing an annuity is the interest rate. Higher interest rates mean your annuity account grows faster.

Here are the three-year and five-year rates for fixed annuity products offered by Canvas Annuity.

Canvas annuity products are simple, low-risk, and no-nonsense. In addition to some of the highest fixed-annuity rates around, they have zero commissions, account charges, or fees.

With guaranteed, competitive rates for three, five, or seven years, Canvas allows you to apply and fund your annuity online in less than 15 minutes and their rates are some of the highest you’ll find in California.

Learn more by reviewing the details online, and if you have any questions, just ask one of their licensed agents.

When you’re ready, apply today and see how much you can earn!