Defined terms for the annuity market and lifetime income landscape.
Ordinary income treatment is the federal tax rule that annuity earnings are taxed at ordinary income rates when distributed, rather than at the lower capital gains rates that apply to long-term appreciation on taxable investments.
The owner versus annuitant distinction is the structural separation in an annuity contract between the contract owner — the person with legal rights to control the contract — and the annuitant, the person whose life is the measuring life for any life-contingent payments under the contract.
A participation rate is the contractually specified percentage of an underlying index's positive return that is credited to a fixed indexed annuity contract during a defined crediting period, with the remaining portion of the index return retained by the carrier as part of the cost structure.
Payout rate is the annual income a lifetime income arrangement pays expressed as a percentage of the premium or account value used to purchase it, and is the single figure most commonly used to compare annuity quotes at first glance.
A penalty-free withdrawal from an annuity is a distribution that qualifies for one of the statutory exceptions to the 10% additional tax on early distributions, avoiding the surcharge that otherwise applies to taxable distributions taken before the contract owner reaches age 59½.
