Death Benefits and Your Annuity

An annuity is a contract between you (the “annuitant”) and an insurance company. You purchase an annuity contract either with a lump sum payment all at once, or with many smaller payments over time. The insurance company invests your payment, and promises to provide you income over a fixed period, which may include the rest of your life. Some annuities include provisions for payments to continue after you die, to support a surviving spouse or heirs. Your annuity contract will govern death benefits and your annuity, so be sure to ask questions and read all terms of the contract.

Select a Beneficiary

If money remains in your annuity when you die, it will revert to the insurance company unless you define a beneficiary in the contract. Naming a beneficiary may speed distribution to the intended person or trust, rather than having the remaining assets go to the estate and be subject to probate. Payments to a beneficiary from earnings on an annuity are taxable, but tax treatment may be different depending on whether the beneficiary is a surviving spouse or another person.

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Payout Options

Annuity contracts may offer several different options for how payments will transfer to a beneficiary. These include:

  • Standard Death Benefit: the value of the contract, minus fees, and withdrawals, on the day the death is reported to the insurance company. If the market is down that day, this could reduce the value of the annuity.
  • Return of Premium: this option pays the beneficiary the original cost of the annuity, or its current value, whichever is greater, less withdrawals and fees. If the annuity has suffered losses, this option may provide a better payout because the original cost is fixed.
  • Stepped Up Benefit: the greater of the current value or the highest value the account reached within a specified time (over the past year, for example).
  • Period Certain: the contract defines a number of years payments will be made, and if the annuitant dies before that time expires, payments go to the beneficiary until the time expires.
  • Life Annuity: payments for the life of the annuitant; if the annuitant dies while the account is still in the “accumulation” phase, the beneficiary might receive the greater of the total premiums paid, or the current value of the account.
  • Joint Life Payouts: payments continue for the life of the annuitant and the annuitant’s spouse, regardless of which partner passes away first.

There are many other options that insurance companies may offer in annuity contracts. Some are available only as “riders” to the contract, for an additional fee. Options may differ depending on whether your contract is for a fixed or variable annuity. If you’re asking yourself, “do I need an annuity?”, consult your financial and tax advisors to discuss all the options for annuities and their death benefits.

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The Difference Between an IRA and an Annuity

Employer-provided 401(k) and 403(b) plans have options for investing in mutual funds of stocks and bonds, real estate investment trusts, and money market funds. Some may also offer options to save in individual retirement accounts (IRAs) and annuities. Self-employed people also have options for establishing IRAs and annuities.

These products offer tax advantages by allowing savers to make contributions on a pre-tax basis, lowering taxable income during the years they’re accumulating savings and growing investments through interest, dividends, and capital gains. With pre-tax contributions, money is only taxed when the retiree withdraws it. When you’re choosing how to allocate contributions in retirement plans, it’s important to understand the difference between IRAs and annuities.

The main difference between an IRA and an annuity is that an IRA is a type of account that can hold a variety of investments, whereas an annuity is an insurance contract paid for over time with regular tax-deferred contributions or purchased in a lump sum with after-tax dollars. An annuity can be one of the assets within an IRA account, but it can also be a separate asset.

In an IRA, the account owner can choose their own investments, and the value of those investments can fluctuate over time. With a fixed annuity, the insurance company manages the investments. Fixed annuities pay a guaranteed minimum payment over a set time, which could be the rest of the retiree’s life or the rest of a surviving spouse’s life.

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In a variable annuity, the purchaser has more say over how their money is invested, and the payout can fluctuate based on performance. Some variable annuities establish a minimum guaranteed payout despite market ups and downs. Indexed annuities track a stock index, and their value can also fluctuate. More flexibility in investments means the possibility of greater returns, but it requires acceptance of greater downside risk.

Annuities can carry high commissions and fees, especially if the owner takes early withdrawals. Surrender fees can be as high as 20% early in the life of the annuity contract.

IRAs have annual contribution limits set by the Internal Revenue Service. Annuities do not. However, annuity payouts are less flexible. With an IRA, the retiree can decide how much to withdraw and when, taking larger withdrawals in emergencies and leaving money to grow when they don’t need it. An annuity ties up a lot of money, and withdrawals are fixed and inflexible. Some retirees prefer the security of knowing they’ll get a check every month, quarter, or year, regardless of how the stock market behaves.

Both IRAs and annuities can be elements of a comprehensive retirement plan. Ask your financial advisor “What is a retirement annuity?” when you’re discussing retirement options. Your financial and tax advisors should help you determine how to manage annuities and other financial and tangible assets for a secure retirement.

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How To Start Planning for Retirement

The United States Department of Labor’s Employee Benefits Security Administration (EBSA) states that only 40% of Americans have calculated how much money they’ll need for retirement. Even more surprising, EBSA reports that, as of 2018, 30% of workers who had the opportunity to contribute to an employer-sponsored retirement benefits plan were not participating. Knowing how to start planning for retirement involves more than being aware that savings are important; a secure retirement depends on understanding different types of retirement plans, how time affects money, and the various sources of supplemental income that may be available in retirement.

Set Goals and Do the Math

Determine how much income you believe you would need to live comfortably in retirement. Calculate for a few different scenarios: Will you be paying college tuition for your children? Will your home be paid off? Also, think about the lifestyle you hope to maintain—will you want to travel, pursue recreation and hobbies, or move to a smaller home? Determine a realistic amount of monthly income you believe you would need.

Assess your comfort with investment risk. Savers who have a long way to go before retirement can take on more investment risk because they have more time to make up for losses. If you can’t bear seeing the value of your investments decline, or if volatility in financial markets makes you seasick, you may want to opt for more conservative investments. Given enough time and the power of compounding, a conservative investment strategy can still pay off.

Do the math to determine how much you’d need to save to achieve your desired income in retirement. Be realistic about your rate of return—it’s much more likely that your money will earn an average of 5% over the years than a booming rate of 10% or more. In addition, healthcare costs are unlikely to go down and typically increase as we age. These can eat up an enormous percentage of assets in the event of catastrophic illness or a prolonged period of disability. Look into long-term care insurance and as you approach retirement age, and research Medicare supplemental or Medicare Plus health plans and what expenses they cover beyond what Medicare provides.

Start Early

Setting aside money regularly in accounts that can grow over time is the most important principle of planning for retirement. The effects of compounding, even in a low-interest-rate environment, can pay off handsomely over the years. But, on its own, earning steady interest probably won’t grow your retirement accounts enough to support a comfortable lifestyle in retirement. A diverse mix of investments—typically available in defined benefit plans like 401(k) or 403(b) plans—will include funds in stocks for growth and value, in bonds for income and as a hedge against market downturns, and in real estate investments.

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Contribute the Maximum To Your Employer Plan

Defined benefit plans offered by many employers allow employees to contribute money on a tax-deferred basis. This means that you determine an amount your employer will deduct from your paycheck each pay period to be placed into your retirement plan. These contributions reduce your taxable income in the year you make them. Withdrawals will be subject to taxes when you retire, but you will likely be in a lower tax bracket by then. Most employers also offer a “match,” where they will match the amount you contribute up to a specified percentage of your income each pay period; you may then be able to contribute an additional percentage that will add up to as much as 10% or more of your pay.

Pay Yourself First

One common technique for saving is the “pay yourself first” rule: this is a practice of setting aside some amount of income, however small, in savings for yourself before paying bills or doing any shopping. If you are fortunate enough to have a job with wages or a salary that doesn’t completely run out each month, choose a manageable amount of money to set aside in a basic savings account. Once you have built up a rainy-day fund equivalent to at least six months of living expenses, then you can begin to save enough to open a retirement account.

Catch Up

In recent decades, economic conditions have made it difficult for workers, especially younger workers carrying loads of student debt, to contribute anything at all toward retirement. When the economy stabilizes and more secure jobs are available, those who haven’t been saving can begin to catch up. Workers over 50 can make additional “catch-up” contributions toward their 401(k) plan.

Know Your Investment Options

Employer plans may offer many investment options. A core principle of smart investing is diversification. You want to define what percentage of your savings will be invested in which type of available option. Read your plan, understand your investment choices, and ask plenty of questions. Another important thing to understand about retirement planning is when your money “vests.” This refers to how long you must participate in your employer’s retirement plan before the employer contribution is irretrievably yours. Also, find out about how “portable” your retirement savings may be if you change jobs.

There are a variety of investment options that may work together to form a robust retirement plan. These include:

  • Defined benefit plans – These include employer-provided 401(k) or 403(b) plans.
  • Traditional pension plans – These are increasingly rare, but if you have one, make sure to learn all the rules or restrictions.
  • IRAs – Both traditional and Roth IRAs are additional ways to save for retirement; contributions to traditional IRAs are tax-deferred, while Roth IRAs are composed of after-tax contributions.
  • Social Security – Factor in expected social security income at the maximum retirement age. Use the Social Security Administration’s online calculators to determine how much Social Security income you may expect in retirement. It’s prudent not to count on Social Security payments as the sole source of retirement income.
  • Annuities – Ask your financial advisor about the different types of annuities. Annuities provide a guaranteed minimum income, but they also tie up a substantial amount of savings. Some employer plans offer the option to contribute to an annuity over time as one of several ways to allocate your retirement savings. Figure out if an annuity fits with your overall retirement plan.
  • Employment – Retirement doesn’t necessarily mean giving up work entirely. You may want to keep your hand in your business, take a part-time job for fun and social engagement, or launch an entirely new career. Learn the rules about income in retirement that could affect your Social Security payments.

Adjust as You Approach Retirement Age

Shifting asset allocation toward preserving savings and generating income, rather than investing in growth, is typical as retirement age nears. Consult your financial advisor about rebalancing your portfolio gradually as you approach your anticipated retirement age.

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Finally, do everything you can to leave your retirement accounts alone until you stop working. Hard times may sometimes require you to take an early withdrawal, but be ready for big tax penalties and a long road back to building up to what you had before you made a withdrawal. Avoid it if you can. Planning for retirement requires determining your vision for your lifestyle in retirement, setting goals, and sticking to them.

How the Stock Market Affects Your Retirement

Retirees and those approaching retirement worry about volatility in the stock market. Big market drops can send a chill down the spine of those who depend on retirement savings invested in stock mutual funds, ETFs, and index funds. Market whiplash creates uncertainty about whether hard-earned and carefully saved money will be there when retirees need it. Learn how the stock market affects your retirement so you can prepare a strategy to soften the effect of market downturns.

Review Your Asset Allocation

In the simplest terms, the impact of the stock market on your retirement portfolio depends on what percentage of the portfolio is invested in stocks. However, the market has recently been defying the usual rule that when stocks go down, bonds go up. Extremely low-interest rates have affected bond prices. Bonds issued years ago with higher than the current interest rates have become more attractive and have risen in price, while newer bonds with lower interest rates are unattractive to income investors. However, stocks that pay dividends, distribute capital gains, and have the ongoing potential to rise in price provide a higher effective yield than most quality bonds in low-interest rate environments. In good times, stocks may provide greater returns, but they also carry a greater downside risk.

Asset allocation is the term that describes the portion of an investment portfolio invested in various types of financial instruments. People with years to go before retirement can be more aggressive investing in stocks, as their portfolios have more time to recover from market downturns. People nearing or entering retirement should consider rebalancing their portfolios to reduce exposure to stocks and increase investments in income-producing products.

Determine Sources of Income in Retirement

While social security benefits should provide some income in retirement, concerns still exist about whether social security will run out of money as the Boomer generation begins to draw heavily on the fund. This means retirees must think about other ways to supplement income. This can include working for longer, continuing to contribute to retirement accounts to save more, and delaying taking social security until the required age. Those nearing retirement can also consult a certified annuity advisor to discuss ways to provide a guaranteed minimum income in retirement that won’t be affected by market swings.

It’s important to remember, however, that as life expectancy rises, most people will need money in retirement for many more years than in the past. Therefore, people entering retirement shouldn’t abandon stocks entirely, as these investments can continue to grow over decades of retirement. Creating a strategy based on withdrawing a minimum amount necessary to support basic needs that can be adjusted up in good times and can revert to the minimum during downturns can smooth out the impact of the stock market on your retirement. Be sure to contact your financial advisor to devise a strategy to find the best asset allocation and withdrawal plan that accounts for your life expectancy and your lifestyle needs in retirement.

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How To Transfer an Annuity From One Broker To Another

Annuities are contracts with insurance companies. Sometimes, something better comes along years after you purchase an annuity, or you may simply become dissatisfied with your brokerage and want to transfer your investments, including an annuity, to a different firm. It is critical to know how to transfer an annuity from one broker to another to avoid tax penalties, surrender charges, and negative impacts on survivor benefits.


Annuitants who have yet to reach age 59 ½ face potentially large penalties if they withdraw money from an annuity, even if it’s to buy another one. A direct 1035 rollover can avoid IRS tax penalties if you transfer the annuity to another that is substantially similar.

An indirect rollover occurs when the insurance company sends a check, which the annuitant uses to purchase another annuity. The purchase must occur within 60 days, or the check will be considered a distribution. An indirect rollover is not eligible as a 1035 exchange and may be subject to taxes. Your new annuity broker must be authorized to offer the same type of annuity as your previous contract.

Surrender Charges and Fees

Be very careful when considering a rollover, as surrender charges imposed by the original annuity company may still apply. Some surrender periods can extend up to ten years, imposing steep percentage charges if you take money out before that time has elapsed. The new annuity may also impose surrender charges. Be sure you fully understand the terms before selecting a replacement annuity. Annuities may offer bonuses for exchanging into the new contract, but beware—associated commissions or fees may consume any bonus offered.


Transferring or exchanging an annuity from one broker to another requires attention to detail. A 1035 exchange requires that you purchase the new annuity under the same name as the old, with no changes in ownership. Read everything carefully, ask questions, and seek legal and tax advice if necessary.

Death Benefits

Some annuities offer death benefits to surviving spouses or heirs if the annuitant dies during the life of the annuity. These can be quite favorable, as they guarantee the original amount invested even if the value of the annuity has declined substantially. However, if the annuity is rolled over to a new annuity when it has lost substantial value, the death benefit may not travel with it. In other words, instead of returning the full original purchase amount or the highest value the annuity attained during the life of the original annuitant, the new contract may provide only the value at the time of the rollover.

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Ways To Turn Retirement Savings Into Income

Anyone who has received that intermittent mailing from the Social Security Administration may wonder how they can live on what they’ll get in retirement. Those who have diligently saved for retirement anticipating this shortfall have several ways to turn retirement savings into income. Here’s a brief selection of income-producing strategies for retirees.

Learn the 4% Rule for Withdrawals

A plan for the strategic withdrawal of funds from retirement savings can help stretch your money over thirty years or more. When you have reached retirement age, the 4% rule says to withdraw no more than 4% of your savings in the first year. In subsequent years, you would withdraw 4% plus an additional amount to adjust for inflation. For example, if you have $500,000 in savings, you would withdraw $20,000 during the first year. The next year, assuming an inflation rate of 3%, you’d take out that $20,000 plus an additional $600 (3% of 20,000) to adjust for inflation. These funds would supplement your social security payments for the withdrawal year.

Low interest rates and a sagging stock market can affect returns in retirement accounts and may blunt the effectiveness of the 4% rule. If your retirement savings are invested in conservative instruments like bonds, and they are yielding 2.5% interest, your money may not last the 30 years that the 4% rule predicts. Retirees who are concerned about outliving their money or scraping by on a pittance in their later year should consider scaling back their withdrawals in the earlier years of their retirement.

It’s also important to keep an eye on the balance of investments in your portfolio. Historically, stocks perform well over time, and portfolios balanced with 60% stocks and 40% bonds have endured the predicted 30 years.

Adjusted or Dynamic Spending

The 4% rule is a method that can stretch savings over bad times—but it doesn’t really recognize that there can be good times as well. When a retirement portfolio swells in value during a booming market, it may make sense to withdraw a little more. Running an annual simulation through a retirement income calculator produces an estimate of how long savings will last based on the current account balance and your planned withdrawals. If the odds of running out of money have gone up, you can scale back your withdrawals, but if those odds have plummeted, you can consider withdrawing a little more, while the remainder of your account continues to grow. Dynamic spending is a method where you set a range—establishing a maximum rate that you will never exceed and a minimum rate that is the least you can live with—to provide flexibility as market conditions warrant.

Another adjustment you must plan for is the required minimum distribution (RMD) from retirement accounts you hold. These include IRAs (except Roth IRAs), 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and any other defined contribution plans. The age you must begin taking the distribution is now 72, except for those who reached age 70 ½ before January 1, 2020. The IRS maintains worksheets for calculating the RMD you must withdraw based on your age, your marital status, the estimated distribution period, and the balance in your retirement account(s). Failure to take the RMD results in enormous penalties, so retirees should pay close attention to their approaching RMD date.

The Bucket Method

Another, perhaps simpler, way to plan for income in retirement is known as the bucket method. With this strategy, you identify a spending bucket designated to last a set period of years, and an investment bucket, devoted to continued growth. The spending or withdrawal bucket stays invested in low-risk, high-liquidity investments like high-quality bonds or money market funds. The growth bucket can accept more risk and volatility, investing a greater percentage in stocks. Retirees can count on the withdrawal bucket for income, easing worry about market downturns in the growth bucket. Retirees can identify additional buckets to segment their savings—for healthcare expenses or emergencies, travel, or charitable giving.


Although traditional defined benefit (pension) plans are becoming rare, those who have them may be able to take their withdrawals in the form of an annuity—a regular monthly income calculated based on the amount in the pension fund and the participant’s life expectancy. Those with the much more common defined contribution plans (401(k) plans, 403(b) plans, etc.) may be able to roll over the entire balance (lump-sum distribution) into an IRA and manage their money within that type of account.

Another option with a lump-sum distribution is purchasing an annuity. These contracts guarantee a minimum income over a specified amount of time. Investors purchase immediate annuities with a large lump sum, and payments begin right away. These tie up a lot of money for a long time, but they do provide nearly immediate monthly income.

One can purchase other annuities with several payments over time, and the insurance company providing the contract invests those payments so that the amount in the account grows during this “accumulation period” until it is time to begin distribution. Annuities can supplement other types of retirement investments and offer retirees who don’t feel confident managing their own investments a reliable income. There are many different types of annuities with different features, fees, and potential pitfalls. Annuity brokerage agencies can help retirees understand the pros and cons of different types of annuities and whether an annuity is a good choice as part of their overall financial plan.


Retirement doesn’t necessarily mean stopping work altogether. The Social Security Administration imposes limits on how much you can earn per year if you are taking social security prior to your full retirement age, so keep that in mind if you decide to launch a “third act” career or take a part-time job.

Another way to turn retirement savings into income is through investment property. Retirees with substantial savings can consider a second home as a source of income. Tenants pay rent, either through a long-term lease or short-term vacation rentals. Real estate investing is a business, requiring management, maintenance, and accounting, so it’s not the best fit for retirees who hope to spend their time primarily in leisure pursuits.

Tax Treatment

Of course, part of any financial plan for retirement is anticipating how retirement income will be taxed. Withdrawals from tax-advantaged accounts (where your contributions were tax-deferred) are taxable as ordinary income. Dividends, interest, and capital gains are also subject to taxes. Consult your tax advisor to help you calculate the impact taxes may have on your retirement income.

Turn Retirement Savings Into Income

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Annuities and Social Security Income Limits

Social security benefits may be affected by your age, the time you elect to begin receiving payments, and by how much money you make. People close to retirement age may wonder about annuities and social security income limits. However, the Social Security Administration (SSA) does not count income from pensions, annuities, dividends, or interest. It only counts “earned” income, which is the wages you receive from a job or profits from self-employment, plus commissions, bonuses, and vacation pay.

There is a notable exception, however. Some individuals receive Supplemental Security Income (SSI) due to a disability that makes it difficult or impossible to work and support themselves. This is a “means test” program, meaning the SSA puts strict limits on how much income you receive based on your total resources. This includes both earned and unearned income and the value of things you own. If someone receiving SSI also receives annuity payments, their SSI may be reduced or terminated.

Age-Based Income Limits

For non-disabled workers, the SSA places a limit on how much earned income you can have per year while also drawing social security benefits. The earliest age you may begin drawing social security is 62, while the full retirement age is 66 or over for those born after 1943. Anyone born in 1960 or later doesn’t reach full retirement age until 67. Generally speaking, it’s best to wait until full retirement age to begin drawing social security. This is because if you take payment early than that, your payment will be reduced by as much as 25-30%. Furthermore, if you begin taking social security payments before your full retirement age, your benefit will be reduced by $1 for every $2 over the income limit social security imposes. For 2020, that income limit is $18,240.

SSA applies a formula to determine your benefits if you retire at your full retirement age unless you were earning more than $48,600 in the months before you retire. Your benefit will then be reduced by $1 for every $3 you earned over the limit in the months before the month in which you reach full retirement age. Once you reach full retirement age, there is no limit on your earnings.

The SSA provides useful calculators to determine your full retirement age and covers how your earnings could affect your benefits depending on your age.

Annuities can supplement social security income to help bridge any income gap between what you’ll receive from social security and what you may need for a comfortable retirement. Remember, however, that even if the SSA doesn’t count unearned income, you will still pay taxes on annuities (unless purchased with after-taxed dollars), dividends, capital gains, and interest from investments. If you are asking yourself, “do I need an annuity?” consult your tax and financial advisors to help you determine whether you will have enough income for retirement as well as how that income may be taxed.

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How Different Annuities Are Taxed

As the saying goes, two things are certain: death and taxes. Annuities can’t prevent the first, and taxes on them must be paid eventually. But the type of annuity you purchase or contribute to affects how much of your money will be taxed, and at what time. As with any kind of financial product, individual circumstances affect how rules apply. This summary of how different annuities are taxed is offered as general information – be sure to consult your tax advisor before making any decisions about purchasing, contributing to, or withdrawing money from an annuity.

Contributions, Capital Gains, Interest, Income, and Withdrawals

Money is money, but the IRS defines it in different ways, especially when it comes to annuities. An annuity is a contract with an insurance company. The contract promises the annuitant (the purchaser of the annuity) a regular payout beginning at a certain time or when the annuitant reaches a certain age, over a fixed number of years, or throughout the annuitant’s lifetime. What happens from the time the contract is made until the time payouts begin, as well as what happens after an annuitant dies, all affect how the purchase money is taxed.

Annuities can be purchased in a lump sum, or with several contributions over time. People who are still years from retirement can make regular contributions to an annuity and allow the money to grow over time. That timespan is called the “accumulation period.” The insurance company that offers the annuity contract will take those contributions and invest them, usually in mutual funds and bonds. As those investments grow in value (capital gains) or pay dividends and interest, the value of the annuity grows, increasing the amount of future payouts when the annuitant reaches retirement age, or the agreed-upon date when payouts begin. The payouts, as well as withdrawals, are treated as income in the year they are received. Principal, or the money you paid to buy the annuity, also affects how annuities are taxed, depending on whether that purchase money had already been taxed or not.

Contributions to Qualified vs. Non-Qualified Annuities

The most significant differentiation is whether the annuity is a “qualified” or “non-qualified” one. A “qualified” annuity is one that you purchase with money that hasn’t already been taxed, like pre-tax contributions taken from your paycheck and invested in a 401(k), or your tax-deferred contributions to your IRA (up to IRS limits). The money you put into a qualified annuity grows tax deferred. You only pay taxes on it when you take a withdrawal or begin payouts, when it is taxed as ordinary income . The only exceptions are income from annuities paid for with money from Roth IRAs or Roth 401(k)s, if IRS requirements are satisfied. If you are thinking of buying an annuity with money you invested in a Roth IRA or Roth 401(k), talk to your tax advisor first so you understand the requirements.

A “non-qualified” annuity is one that was purchased with money that has already been taxed. Taxes will be due only on the earnings of a non-qualified annuity. However, the calculation of the tax is made according to a formula called the “exclusion ratio.” The exclusion ratio determines what percentage of a payout or withdrawal comes from money that had already been taxed, and which portion comes from earnings on that money that hasn’t been taxed yet.

The exclusion ratio also takes the annuitant’s life expectancy into consideration. The ratio is meant to distribute the non-taxable principal over the purchaser’s lifetime, based on the actuarial calculation of life expectancy. If you purchase a non-qualified annuity and end up living longer than the life expectancy of the actuarial prediction, all the money paid out from that point forward will be taxable.

Withdrawals vs. Payouts

The IRS imposes harsh penalties for money withdrawn from annuities before age 59 1/2. Before that age, if you take a lump sum withdrawal, you must pay a 10% early withdrawal penalty, in addition to paying income tax on the earnings. On top of that, many annuities charge “surrender fees” for taking money out earlier than planned. These fees can be steep, especially if you haven’t owned the annuity for very long. Read the fine print about withdrawal penalties before you choose the right annuity for you.

Even if you are older than the minimum age for withdrawals without penalty, you should know that if you take a lump-sum withdrawal, you’ll pay taxes on the entire amount the year you withdraw the money. That can put a significant dent in your principal and leave you with lower earnings and thus less income for your retirement. The point of an annuity is to spread your money out over the remainder of your lifetime or throughout the number of years the contract specifies. If you take it all at once, you’ll pay taxes, and unless you are a financial wizard, you may risk losing more money depending on how you invest the money you withdrew.

Payouts, on the other hand, take the form of an agreed-upon income stream, and they are usually paid monthly. For qualified accounts, these payouts are taxed as regular income. Non-qualified annuities are subject to the exclusion rate calculation to determine the tax on their payouts and in order to figure out how much of each payout should be treated as returned principal and not taxed, as well as how much is earnings that should be taxed. Most retirees who begin payouts are in a lower tax bracket than they were when they were earning a salary or wages, so the tax rate on annuity income payouts may be lower. But the bottom line is that taxes are certain – you will either pay them before you put money into an annuity or when you take it out.

Inherited Annuities

Generally speaking, if you assign a beneficiary to inherit your annuity payments after you die, those payments will be subject to the same kind of tax rules as they would have been for you. If the beneficiary is your spouse, they can elect to take payments in the same way and on the same schedule as you did. If the beneficiary is not the annuitant’s spouse, then there are a variety of scenarios that may apply.

Non-spouse beneficiaries can take a lump sum and pay taxes on the annuity the year they receive it. Or, they can spread payments out over five years, paying taxes on the amount received each year. That rule requires that the entire remainder of the annuity be paid out over the five-year period. Other rules may allow a non-spousal beneficiary to stretch payments out over the rest of their life. The choice comes down to either taking a large lump sum that gets the beneficiary’s money more quickly but also applying a big tax bill or taking less money all at once with payments spread over time and paying less tax over more time. Beneficiaries may be able to exchange an inherited annuity for one of their own of the same type (qualified or non-qualified) if they find an annuity which offers better terms. Or, they may be able to roll the annuity into the deceased’s IRA, if the beneficiary also inherited that account.

As you can see, knowing the answer to “what are the different types of annuities” will have an important impact on the annuity you choose and to the tax treatment of withdrawals and payouts when the time comes. Consult an experienced, qualified annuity broker to discuss your options, and check with your tax advisor before you decide what type of annuity is best for you.

How Different Annuities Are Taxed

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How to Keep Assets Safe from Creditors with an Annuity

In a perfect retirement, all debts, including mortgages, would be paid off and savings would provide a comfortable lifestyle for as long as you live. Life, however, doesn’t always work out the way we plan. Thankfully, there are ways to protect hard-earned savings to ensure you have a reliable income during retirement. One strategy to explore is how to keep assets safe from creditors with an annuity.

Planning Ahead is Critical

You can’t protect your money by shifting it into a retirement account after you’ve already been sued or when you know that bankruptcy or litigation is imminent. Courts and regulators will sniff out this type of abusive transfer immediately and impose severe penalties. You must be able to show that asset protection has been part of the plan all along and wasn’t undertaken in reaction to some financial threat that just appeared on the horizon. This is why it’s critical to determine how you plan to protect retirement assets as far in advance as possible and never during a crisis or dispute with a creditor or potential litigant.

Get Advice About Applicable Law

Federal bankruptcy law protects a very limited amount of retirement savings held through an annuity or life insurance accounts. It extends some exemptions to funds from annuities due to death, disability, or length of service paid in amounts necessary for a debtor’s support. Exemptions for annuities held in retirement accounts subject to the Employee Retirement Income Security Act (ERISA) and IRAs are more generous.

State laws, however, vary widely, and only Texas and Florida provide a complete exemption for annuities. Other states impose dollar limits or have statutes that are aimed to protect creditors, not retirees. Always consult with a lawyer and accountant about the tax implications and asset protection provisions in your state for any annuity you are considering purchasing. A knowledgeable and experienced annuity broker can find you an annuity that would meet your current needs, but cannot advise you regarding legal implications.

Annuities should be a part of your retirement planning along with other kinds of assets designed to ensure a reliable income in retirement. Depending on the state you live in, annuities may help keep assets safe from creditors in the future if debts or unexpected litigation create new financial obligations.

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The Advantages of a Retirement Annuity

Retirement annuities are one of many strategies that provide financial stability in retirement. Smart retirement planning often includes annuities to supplement other retirement savings and plans. Reviewing the advantages of retirement annuities should be part of any retirement planning conversation.

Steady Income in Retirement

Annuities provide the comfort of a steady income stream in retirement. While it takes a substantial sum to generate enough return to serve as the sole source of income, annuities can supplement other types of savings, providing a steady and reliable flow of income when other investments fluctuate.

Payout Options

Immediate annuities start paying out right away from a lump-sum purchase price or a rollover of another account, such as a 401(k) from a previous employer. Although purchasing an immediate annuity ties up a substantial sum, it may provide peace of mind that there will be some steady income starting right away.

Deferred payment annuities are those you contribute to over time, allowing your savings to build up over time, through compounding interest or even capital appreciation of the underlying investment.

Tax Advantage

The best-known advantage of a retirement annuity is tax deferral. With employer plans that include an annuity, you contribute money from your paycheck before taxes. These pre-tax contributions may reduce your taxable income during the “accumulation” phase, while your money grows until you retire. In an annuity, your savings and their proceeds are tax-free until payouts begin. By then, you may be in a lower tax bracket which could end up saving you money.

Products That Match Your Investment Style

Cautious investors, or those who aren’t confident in the choice of their own investments, appreciate the security of fixed-rate annuities. The insurance company that sells the annuity to you enters into a contract with you where they promise a guaranteed minimum income over a pre-determined number of years, usually for the rest of your life. Some provide extended coverage for surviving spouses. While the yields tend to be lower on fixed annuities, some retirees prefer the assurance of a promised minimum payout.

Variable annuities allow more flexibility. You decide how to invest your money from the options the insurance company makes available. These usually include a selection of mutual funds. Your investment value may fluctuate with market conditions, and these annuities may carry higher management or other fees. Confident investors who prefer to choose their own investment mix might prefer a variable annuity.

Security Against Outliving Your Money

Specialized annuities that permit long-term deferral of income, beyond the age when withdrawals are mandatory for other types, provide a way for those with substantial means, who don’t need income immediately upon retirement, to set aside money for later in life. Called “qualified longevity annuity contracts” or “QLACs,” these contracts are subject to IRS rules about how much you can set aside within them. They are designed to provide security against outliving your money if you anticipate a long retirement. They typically allow deferring payouts until as late as 85.

When annuities come into the discussion of financial plans for retirement, consult a certified annuity advisor for help in understanding which options might be best for you.

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