Whether or not your annuity affects your financial aid and other benefits largely depends on your specific situation — including the organization assessing your needs, and in some cases, the type of annuity you have.
From student financial aid to Social Security and Medicaid, here are some benefits that might be impacted by your annuity income.
Learn more about how annuities work
Impact on financial aid: FAFSA & CSS profile
Whether or not your annuity impacts financial aid depends on the specific type of annuity you purchased, and sometimes, whether you bought it with pre-tax or post-tax dollars.
The Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service Profile (CSS) also have differing guidelines on what needs to be reported. [1] Below are how the two organizations differ when assessing the need for financial aid.
The FAFSA
While you do have to include information on some types of assets when filling out the FAFSA, the instructions dictate that annuities and retirement accounts don’t need to be reported under assets or investments. [2] This can make annuities more favorable than traditional investment accounts if you’re trying to qualify for more financial aid.
The CSS
The CSS Profile is used to give out non-federal aid. Some colleges may require you to fill out the CSS, but not all of them do. Unlike the FAFSA, it requires reporting of all assets, including retirement accounts. [3]
The CSS also considers non-qualified annuities investments, so you’ll need to report all retirement accounts — including qualified annuities — but non-qualified accounts may have more of an impact on financial aid eligibility.
Are annuities a good investment?
Impact on Social Security benefits
Your annuity income can affect different types of Social Security benefits in different ways, depending on the types of benefits you’re looking to qualify for.
You can always contact a Social Security representative if you’re not sure how your annuity income will impact your benefits.
Can you withdraw money from your annuity?
Retirement benefits
Income from an annuity can impact the taxes you owe on your Social Security benefits, but it won’t reduce your Social Security retirement benefit amount — only earned income from employment will impact your Social Security wages. [4] Any kind of income from pensions, annuities, and investment dividends doesn’t count, because this kind of income isn’t viewed as a kind of earned wages. [5]
How does an annuity fit into your retirement plan?
Disability benefits (SSDI)
Social Security disability income is also based on an individual’s work credits, as well as their disability. [6] You must have a qualifying work history to secure benefits, regardless of age. Since SSDI is based on work history and ability to work, income from annuities may not detract from your SSDI benefits.
Supplemental Security Income (SSI)
On the other hand, annuity income can affect your ability to qualify for additional assistance with SSI. Supplemental Security Income (SSI) is a type of financial assistance provided to older adults or people with disabilities with limited resources.
In 2024, you must have less than $963 per month in unearned income in order to receive SSI, and less than $1,435 per month if you and a partner are applying for SSI jointly. [7]
Unearned income can include Social Security benefits, workers’ compensation, pensions, annuities, rent payments, and other income that isn’t earned from employment.
Learn more about the different types of annuities
Impact on Medicaid eligibility
In order to be eligible for Medicaid long-term care, your assets must fall under a certain threshold. In 2024, most states limit your assets to $2,000, although several categories of assets are considered exempt. Plus, applicants are allowed up to $2,839 per month in income in most states. [8]
Medicaid’s Look-Back Rule also dictates that you can’t give away assets in order to meet the asset limit. However, some annuities are Medicaid compliant, so this is one way you could convert your assets to an income stream, so they’re counted toward the income limit instead of the asset income.
Different states can have unique exceptions and stipulations to Medicaid qualifications, so before using an annuity as part of your strategy, make sure to familiarize yourself with your state’s guidelines and consult a professional.
What is the impact of interest rate changes on your annuity?
Deferred annuities
Medicaid considers deferred annuities assets, so this type of annuity can’t be used to help you qualify. Deferred annuities can be purchased with a lump sum, or a series of payments over time. Then, your principal gains interest over the next several years, and oftentimes longer. You don’t receive income until three to 10 years in the future — or even longer.
Immediate annuities
Immediate annuities are Medicaid compliant, which means previously counted assets can be turned into non-countable assets according to the limits set by Medicaid.
Immediate annuities are purchased by paying a single lump sum of money to an insurance company. That sum of money is then turned into an income stream that can last for a specified number of years, based on your estimated life expectancy. Payments can start as soon as within 30 days, and no longer than one year later.
Can annuities be used as collateral for a loan?
Impact on Medicare premiums
Typically, if you have a higher income, you’ll pay more for Medicare premiums. To determine your premiums, Social Security will use your most recent tax return provided by the IRS in order to calculate your modified adjusted gross income, or MAGI. [9]
Depending on the type of annuity you purchased, different portions of your annuity income will appear on your tax return. If you bought your annuity with pre-tax dollars (qualified funds), you’ll pay taxes on the principal and interest. If you bought your annuity with post-tax dollars (non-qualified funds), you’ll only pay taxes on the interest earned. [10] Regardless, at least a portion of the payments you receive will count toward your taxable income.
As of 2024, you’ll pay more for your Medicare prescription coverage if your income is above $103,000 if you file individually, or $205,000 if you file jointly. [11]
If you’re not certain where you land and you need to talk to a Medicare professional, you can contact them using Medicare.gov.
