What Options Do You Have For Annuity Payments?
If you’re considering the purchase of an annuity, there are many benefits that you could attain. For instance, funds in the account are allowed to grow on a tax-deferred basis. This means that there is no tax due on the gain in the account until the time of withdrawal – which could be many years in the future.
Annuity payments are another key advantage of these financial vehicles. In fact, annuities are known for their ability to pay out an income stream for either a specific period of time – like 10 or 20 years – or even for the remainder of the annuitant’s (i.e. the income recipient’s) lifetime.
So, how do you know when the time is right to start generating annuity payments?
The answer to that is, it depends.
Immediate versus Deferred Annuities
As it pertains to the timing of annuity payments, you could purchase either an immediate or a deferred annuity. Immediate annuities are typically purchased with one lump sum. Retirees will oftentimes roll over money from an IRA (Individual Retirement Account) and/or an employer-sponsored retirement plan like a 401(k).
With an immediate annuity, the income payments will start right away – or at least within 12 months of purchasing the annuity. This is why immediate annuities are often referred to as “income annuities.” These differ from deferred annuities.
With a deferred annuity, you can make one or more contributions over time. The money in the account is allowed to grow tax-deferred. So, depending on the returns that are generated, and the amount of time that the money is in the account, the value could grow significantly.
Deferred annuities may not pay out an income for many years – if ever. When the annuitant receives payouts from a deferred annuity, they may owe ordinary income taxes on some, or even all, of the payment.
Annuity Payment Options
Annuities will typically have several different income payout options to choose from. These usually include:
- Life Only – The life only annuity payout option will continue to generate an income for as long as the annuitant lives – regardless of how long that may be. This payout can help to alleviate the fear of running out of income during retirement while it is still needed.
- Period Certain – With the period certain annuity payout, income will be generated for a set period of time, such as 10 years. If the annuitant dies before that time period has elapsed, the insurance company will continue to pay out the remaining income payments to a named beneficiary.
- Life with Period Certain – Life with period certain is a “combination” of the life only and the period certain income options. Here, income will be paid for the lifetime of the annuitant. However, if he or she passes away before a certain time has elapsed – such as 10 or 20 years – a named beneficiary will continue to receive the payments for the remainder of the time.
- Joint and Survivor – Many couples will opt for the joint and survivor annuity payout option. In this case, income will continue to be paid out until the death of the second individual. In some cases, the dollar amount will remain the same after the first death. However, in other cases, the dollar amount may decrease.
In some instances, the entire lump sum may be withdrawn from an annuity. While this could allow for the receipt of a large amount of money at one time, it is important to keep in mind that taxes will be due on the withdrawal for the year it was received.
Which Annuity Payment Option is Right for You?
Because there is no single annuity payment option that is right for everyone across the board, it can be helpful to discuss your short and long-term savings and income options with an annuity specialist.
At CRIS Financial, LLC, our mission is to educate as many people as possible on how annuities work, and whether or not an annuity is right in their situation. If you would like to speak with an annuity specialist, we can be reached at (281) 665-3081, or by going to our contact form at www.crisfinancial.com. We look forward to hearing from you.