Working With Annuity Subclasses
Length of Time
The length of time between the signing of the contract and the actual annuitization of funds will vary depending upon individual desires and needs. While some annuities are designed to accumulate interest for years, others are made to provide income right away. Deferred annuities take over a year before annuitizing; immediate annuities begin distributions sooner than a year after the signing of the contract. In some cases, the contract you sign will not specify which of these your annuity falls under leaving the contract owner the freedom to choose when to annuitize.
An immediate annuity is usually best for someone who is already retired and creates a single premium annuity with a lump sum payment. We will talk more about this below, but basically, this choice allows you to take a large sum of money and turn it into a regular source of income.
With deferred annuities, your money grows for a longer period of time. And, annuitization is not your only option for getting your money back when you are finally ready to do so. This is the main purpose of annuities because it puts into action the benefits that come along with them, such as saving money for the lifetime of your spouse, but life happens and there are times where annuitizing is not the best choice for you.
Another choice for withdrawing your cash is to simply withdraw it all. There are surrender fees associated with this option if it is done within a specific timeframe, usually within the first ten years. For example, if you decide after three years that you need all of that money back, there could be an 8 percent fee that the insurance company charges you. These fees will vary from company to company and even from annuity to annuity. Knowing what they are ahead of time is important. They will be stipulated on your contract before you agree to anything.
Some people prefer making smaller systematic withdrawals when they are needed. This option lets you keep the annuity in place and reserves you the right to annuitize it in the future, but gives you access to your cash without putting that process in place. If you need money for a mortgage payment before you are fully retired (but over 59 ½ years old), then a small withdrawal here and there might be more beneficial than annuitizing. Again, this is a decision that should be made with a professional.
Just remember that once the annuitization process begins, it cannot be reversed. It’s important to take a look at your situation and spend some time thinking about what’s best for you before you put a withdrawal plan into place. Speaking with a financial professional can help you gain some guidance in this area if it is needed.
The tax status of an annuity plays an important role in distributions. When pre-tax dollars are used to fund an annuity, such as some types of IRA annuities, the annuity is considered to be qualified. If post-tax dollars are used, the annuity is nonqualified. This status will decide how taxes are taken out of your distributions after the annuitization period begins.
There are a few things to consider here. First, take a look at where the money is coming from. If you are taking money that you’ve earned that would otherwise be sitting in a bank account or your wallet and investing it, this is going to be non-qualified without question. If you are transferring your 401(k) from work into an annuity, then it is usually best to keep these pre-tax dollars growing in a qualified annuity. Decisions like this are easy, but there are always other cases that will need further examination.
Usually, choosing the best tax status of your annuity is a decision that should be reached with a tax professional. There are benefits to using both pre and post-tax dollars, but even many licensed insurance agents are not qualified to make this decision for you. If you are unsure of which will help you to grow your money in the most beneficial way, then get in touch with your tax preparer today to have a look at this.
Finally, the way you put money into an annuity will fall into one of two categories. If you are putting just a one-time payment into your annuity, it is considered to be a single-premium annuity. Sometimes this distinction is granted to any annuity that accepts premiums for up to one year after signing the contract. If you are putting money into the annuity for over one year, it is considered a flexible premium annuity.
A single premium annuity is usually best for individuals that come into a large sum of money all at once. If you won the lottery, received an inheritance, or you were awarded a large cash settlement because of a lawsuit, transferring all or most of that money into an annuity would be a way to protect your money and ensure that it would grow and be available to you throughout your lifetime. Because annuities are an insurance product, it also ensures that the money would move to an heir if you passed away without going through probate or being subject to larger than necessary taxes.
A single premium annuity may also be a good idea for seniors that have been required to begin distributions from a retirement account. Current laws for many retirement accounts such as IRAs and 401(k)s require people to begin taking distributions out of their account if they have not yet started when they reach the age of 70 ½. For most people, this is not a huge deal. For others, they have no use for this money at this point and taking money out of their account prevents it from continuing to accrue interest and grow. In some cases, taking money out of these accounts and opening an annuity with a lump sum payment can be a good idea. Of course, you will want to speak to a licensed financial professional to get a better idea of what will be most appropriate for you and your needs. As people are living longer lives, this is becoming a more sought after option for retirees.
A flexible premium annuity is what most people will benefit from. This is how we typically invest money through our employers or even through state sponsored retirement accounts like Social Security. A small payment is made on a regular basis, allowing your money to index—or grow at the same rate as the overall economy. When you invest money a little bit at a time, you are actually taking steps to make sure that your money keeps up with inflation and grows at the same rate as the rest of the economy. It is how most people can get the most out of investing their cash and growing it over time without actively researching different stocks and taking on a ton of risk.
Because it helps to reduce risk, there’s a lot wisdom in investing a little bit at a time in a systematic fashion—especially if you start at an early age. There are ups and downs in the market; this is only natural. If you lose money when you’re 30 in a variable annuity, you will still have many years to earn money and offset those costs. The overall economy has grown at a rate of about 3 percent per year since the end of the Great Depression. The sooner you start investing, the sooner you can tap into this growth. Indexing your investment through a flexible premium variable annuity allows you to weather the ups and downs of the market in a way that just holding your money or investing it all at once cannot do.