Understanding Annuities in Delaware: A Guide for Annuity Beginners

Annuities in Delaware are regulated and taxed differently than in other states. Notable differences include that Delaware charges a state tax on annuity premiums and also that they charge a state tax on annuity disbursements.

Delaware is one of the most tax-friendly states for retirees, and that’s why many Americans choose to settle there. Delawareans also have access to a wide variety of annuity products that help build up their retirement savings and offer a guaranteed lifetime income.

While annuities function similarly regardless of the state you buy them in, each state is slightly different in how they regulate and tax annuities. So what holds true in North Dakota or Connecticut won't necessarily be the same in Delaware.

If you’re looking to buy an annuity in Delaware, you should be aware that there is a state tax on annuity premium payments. Also, be aware that you’ll pay state taxes on annuity payments that exceed your exclusion amount (which is $12,500 a year for individuals over 60).

In this article, you’ll learn everything you need to know about buying annuities in The First State—how taxes work, Delaware-specific annuity laws, and how Delawareans can buy an annuity.

Note: Annuity rules and regulations in Delaware may change over time. Make sure you review the current laws for updated information, or talk to an annuity expert who specializes in annuities in Delaware.

Delaware’s Tax Treatment of Annuities

Annuity products work mostly the same way regardless of the state you’re in, but different jurisdictions may have different rules and regulations. One of the big differences between annuities in different states state is how they’re taxed.

Does Delaware Tax Annuity Income?

Yes. Some states do not tax retirement income. Unfortunately for Delaware residents, Delaware is one that does.

Annuities are retirement products, so they grow your money tax-deferred. But once you start to receive withdrawals from your annuity account, those withdrawals will be taxed as ordinary income.

On the plus side, Delaware offers a $12,500 exclusion for anyone 60 years old or older.

That means you don’t pay any tax on the first $12,500 of annuity income you earn in a given year—only on any annuity payouts you receive above that amount.

How much taxes do you pay? It depends.

Delaware’s tax rates are graduated and currently range from 2.2% to 5.55% on income under $60,000. The maximum income tax rate is 6.60% on income of $60,000 or over.

Note that social security benefits are not taxed in Delaware. Also, note that how you’re taxed on your annuities in Delaware depends on whether your annuity is qualified or not. Read more about qualified vs. non-qualified annuities here.

Does Delaware Have a State Premium Tax?

Yes, Delaware levies a 2% tax on insurance companies that sell insurance products, including annuities.

While you don’t pay that tax directly, the cost may be passed on to you by your annuity company in the form of fees and charges.

Are There Other Taxes or Fees?

Note that other fees and charges may apply to your income depending on when you receive it. These aren’t Delaware-specific, but they’re important to keep in mind.

1. The IRS levies a 10% tax penalty if you withdraw money from a retirement account or annuity account before you’re 59½ (although there are some exceptions).
2. Also, many annuity companies charge a surrender charge on withdrawals made during the surrender period. This will be outlined in your contract.

Annuity Laws and Regulations in Delaware

Delaware has a robust legal framework that regulates the sales of annuities, life insurance, and other financial products aimed at seniors.

The core of that framework is Title 18 of the Delaware Code, which regulates all insurance products and services. Annuities are specifically regulated by Chapter 29 of Title 18, along with life insurance contracts.

In addition to the law, there are several important agencies responsible for providing oversight of annuity products in Delaware. They include:

• Department of Insurance. Delaware’s Department of Insurance regulates the insurance industry within the state to protect consumers. They license insurance companies, ensure companies comply with laws, and investigate complaints.
• Securities and Exchange Commission (SEC). The SEC is a Federal agency that regulates some types of annuities that are considered securities, like variable annuities. They don’t regulate fixed annuities.

An important component of Delaware’s legal system is that it requires insurance agents, including annuity sellers, to be licensed. This helps ensure that they have the necessary knowledge to provide competent services and are accountable if they act inappropriately or participate in annuity scams.

Buying an Annuity in Delaware

Are you a Delaware resident? Then you might want to consider buying an annuity in Delaware.

Benefits of Annuities

Annuities offer a number of potent financial benefits, including:

• Guaranteed income. Annuities are the only financial product that can provide a guaranteed income stream for life. This makes annuities particularly attractive for retirees looking to supplement other forms of retirement income like pension income and social security.

• Tax deferral. Earnings in some annuities grow tax-deferred until you make withdrawals. This allows your investment to grow more quickly than it might in a taxable account.
• Death benefits. Some annuities come with death benefits, which allow you to pass on your annuity to beneficiaries. This feature can help provide financial security for your loved ones. The annuities we sell at Canvas Annuity have death benefits built in.

• No contribution limits. Unlike other tax-deferred retirement accounts like IRAs or 401(k)s, annuities generally have no annual contribution limits, allowing you to invest as much as you'd like.

Considerations for Evaluating and Selecting an Annuity

Annuities offer powerful benefits, but they might not be for everyone. Here are some of the factors to consider:

• Income needs. Annuities are best for people who need a steady stream of income, especially during retirement.
• Long-term savings. Annuities are generally best for individuals who are thinking long-term and won’t need their money back until years in the future.
• Tax implications. Annuities have tax advantages but also potential tax pitfalls. For example, gains are taxed as ordinary income, and there can be penalties for early withdrawal.
• Risk tolerance. Determine your willingness to accept volatility in your investments. Some annuity types are more risky than others. For example, variable annuities are much riskier, while fixed annuities are much less risky.

Finally, consider the financial strength of the annuity provider. Annuities are long-term financial contracts that can last for decades. You want to be sure the company will be around for the entire duration of your contract to fulfill its obligations.

Ratings from agencies like A.M. Best or Standard & Poor's can give you an idea of the insurer's ability to meet its future obligations.

Types of Annuities Available in Delaware

Delaware residents have access to most of the same types of annuities as are available throughout the rest of the country. Here are the main types of annuities and their primary characteristics:

• Immediate annuities require a lump-sum payment and start providing income almost immediately, often within a year.
• Deferred annuities Allow you to invest money for a period of time before receiving income, offering tax-deferred growth.
• Fixed annuities offer guaranteed interest rates and provide stable, predictable payments, making them more suitable for risk-averse investors.
• Variable annuities allow you to invest in securities through sub-accounts. They offer the potential for higher returns, but payments can vary based on investment performance, and you can even lose money. They’re higher risk.
• Fixed-indexed annuities provide returns based on the performance of a market index, offering a balance between risk and potential reward, usually with some level of guaranteed minimum return.

Each type of annuity has its own pros and cons, tailored to different investment goals and risk tolerances, so look for the option that makes the most sense for you.

Delaware Fixed Annuity Rates

Wondering what return you could earn on the money you put in an annuity? Here are the fixed annuity rates that Canvas Annuity offers in Delaware as of September 2023. See the most up-to-date rates and product features here.

Note: Canvas Annuity is one of the few companies that lets you buy annuities online with no commissions paid.

Buy an Annuity for Retirement in Delaware

Coming up to retirement? If you’re financially prepared, these years might be the best years of your life.

An annuity can help make financial security a reality by providing a dependable, rock-solid source of income you can't outlive. Imagine the peace of mind that comes from knowing you'll have a steady income stream, month after month, just like a paycheck.

Think an annuity might be for you?

Have a look at the low-risk fixed annuity products that we offer at Canvas Annuity. They’ll help you grow your money steadily ahead of retirement. Then, when you’re ready, you can choose to annuitize them and turn them into a stream of income for the rest of your life.

References

• https://revenue.delaware.gov/frequently-asked-questions/personal-income-tax-faqs/
• https://insurance.delaware.gov/wp-content/uploads/sites/15/2016/11/FireTaxInfo.pdf
• https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
• https://www.kiplinger.com/state-by-state-guide-taxes/delaware