Deferred Annuities

Last updated: March 24, 2016

Deferred annuities can be a great way to accumulate money for retirement if you want retirement income beyond what you will receive from Social Security or your pension plan.

  • They are particularly effective if you have many years before retirement.

A deferred annuity is not a vehicle for money you may need for current expenses.

  • If you withdraw income before age 59½, the IRS will usually apply a 10% penalty in addition to ordinary income tax.

    • Similar to the penalty for early IRA withdrawals.

  • Additionally, your insurer may impose its own early withdrawal penalty, known as a surrender charge.

    • This surrender charge will usually decrease and be eliminated over time.

    • The surrender charge will not apply once your annuity has fulfilled its contract terms.

When you are ready to start withdrawing money from your deferred annuity, you will need to choose how to receive your money.

  • You can take it all out in a lump sum, take it as needed or receive it in a steady stream of periodic payments, called "annuitizing."

    • If you annuitize, you can receive a stream of income that is guaranteed to continue for the rest of your life, no matter how long you live.

    • And the tax liability can be spread out for the rest of your life, too.

  • Some annuities also provide an option called "systematic withdrawal". You have a set amount, determined by you, automatically withdrawn and deposited in your bank account on a regular schedule - perhaps monthly.

  • You have many options on how you receive your money. Consult your tax or financial adviser to tailor a plan to your particular needs.

Why Should I Buy a Deferred Annuity?

There are a number of good reasons to consider a deferred annuity as part of your financial retirement plan:

A) You postpone paying income taxes on any earnings until you withdraw money.
  • This is typically during retirement, when you may be in a lower tax bracket.

  • All earnings grow tax-deferred.

B) You can put in as much money as you want.
  • Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to a non-qualified deferred annuity with your after-tax money.

  • You can, however, use a deferred annuity to fund your traditional or Roth IRA, in which case you would operate within IRA limitations.

C) You can provide death benefits to your beneficiaries.
  • If you die prematurely, your annuity can offer a death benefit to your beneficiaries without the costs and delays of probate.

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