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The 4 Types of Annuities: Which is Right For You?


Immediate Annuities Explained: Convert Assets to Income

Option to Make SPIAs Beneficiary FriendlyThere is some misconception that SPIAs will not pay benefits to your heirs when you pass. While it is possible to elect a payment that is optimized for the highest income and contains no death benefits, referred to as life only, the majority of SPIAs sold contain death benefits. One popular option to explore with a financial advisor is “Life with Cash Refund,” where the insurance company pays the heirs any remainder of the initial deposit that was not paid to the annuitant upon death.

Immediate Annuities Explained: Convert Assets to Income

A rough rule of thumb is that you’ll need 80% of your pre-retirement income. After age 59½, an early access withdrawal or any withdrawal that exceeds your GLWB amount will reduce income guarantees. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty. Investing in a variable annuity involves risk of loss – investment returns and contract value are not guaranteed and will fluctuate. Relative to an annuity, Social Security has the obvious advantage of no up-front cost. If you delay your retirement to raise your Social Security benefit, you will forgo income up front. But at least that money doesn’t come out of your savings account.

Planning for retirement?

It may not make sense to load up on immediate fixed annuities when interest rates are low, as these payments depend, to a degree, on the market. But if you need guaranteed income, it probably won’t pay to wait too long, either. Financial organizations like Thrivent that offer immediate annuities frequently offer additional income payout options, like recurring payments over a fixed term, or until you die.

Immediate annuities can help you plan for a wide range of finance needs and goals. You can use them to plan ahead for retirement income, to prepare for costs you know are coming, or to manage a major windfall or lump sum so that you don’t deplete the funds too quickly. The exclusion ratio will be applied to each income payment, indicating how much is not taxable, until the full investment in the contract has paid out. Once the investment has been fully returned, subsequent income payments will be fully taxable.

Are there other things to consider with this type of investment?

Additionally, the purchase of a single premium annuity is irrevocable. That is, you generally cannot surrender this type of annuity in exchange for a contract value. Single Premium Immediate Variable Annuity RiskMost of the SPIAs purchased today are fixed SPIAs. If your single premium immediate annuity is variable, which means it contains market risk, then your payment stream could decline based on changes to the subaccounts that are invested in risk-based assets. Loss of Purchasing PowerMost insurance companies offer optional inflation benefits. If your single premium immediate annuity does not contain an inflation adjustment feature, it could mean that your payment may not be keeping pace with inflationary trends.

Variable annuities are regulated by state insurance departments and the federal Securities and Exchange Commission. A single premium immediate annuity, or SPIA, is a great option for people who seek guaranteed periodic payments in the form of an income stream. You should buy a SPIA if you want the benefit of tax-deferral and the security of a pension-like income stream in retirement that begins within a year of your purchase. Owners can receive payments monthly, quarterly, semiannually or annually. At the time of purchase, you and an advisor will customize your income stream. Payments can be made over one life or two lives, as guaranteed lifetime payments, and can include beneficiary protection for your heirs.

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Investors can incur a significant penalty if they withdraw the invested amount before the surrender period is over. Fixed annuities provide regular periodic payments to the annuitant.

Immediate Annuities Explained: Convert Assets to Income

Must be Irrevocable – The annuity cannot be changed or terminated, which means the money in totality cannot be withdrawn. The only way to receive money is through pre-determined monthly payments. To be eligible for Medicaid long-term care, such as nursing home care, an applicant must have a very limited amount of financial resources or “countable assets” in Medicaid-language. A Medicaid Compliant Annuity is a planning strategy that allows one to lower their countable assets, and therefore, meet Medicaid’s asset limit.

How your annuity investment may potentially grow –Contributions to an annuity can grow in a couple of different ways – through interest rates and by investing your contributions in the market . Wells Fargo and Company and its Affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine Immediate Annuities Explained: Convert Assets to Income how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed. By putting some of your retirement assets in an annuity, you are diversifying the sources of retirement income that you have. Enjoy guaranteed income for the rest of your life, starting today.

  • Speak with a financial planner or trusted insurance agent if you have any doubts.
  • Annuities with inflation protection can be purchased, but the cost, in general, is significantly higher.
  • But fixed annuities provide no possibility of leaving an asset for heirs, and also do not allow for possible market increases, as do GLWB variable annuities.
  • Either way, the annuity contract will typically be included in the deceased’s estate, and the beneficiary will be taxed on any proceeds they receive at ordinary income tax rates.
  • Turning on customized lifetime income from your TIAA Traditional or CREF annuity could mean you’ll spend less time worrying about your income in retirement and more time enjoying the life you’ve built.
  • It is also wise to discuss your goals and all of the options with a professional, or someone you trust, before you make a decision.
  • For any amount of premium you would like to put into the contract, the insurance company will tell you how much monthly income they can offer.

Deferred annuities are a great option if you want to contribute your retirement income on a tax-deferred basis – meaning you are not taxed on the retirement income until you take money out. Unlike IRAs and 401s, there are no contribution limits for deferred annuities.

That guaranteed interest rate on your investment could apply to anywhere between a year and the full-length of your guarantee period. Annuities can be a great addition to your retirement income plan, as they are one of the few investment solutions that can ensure you won’t outlive your money. When selecting the type of annuity that’s right for you, and based upon the terms of your contract, you can receive your payments without any additional effort. An annuity with lifetime income provides you with a reliable, predictable stream of income for the rest of your life, reducing concerns you might have about living longer than your money.

  • That may sound like a solution you need — particularly if you don’t know how long your savings will last.
  • The free-look period is a set time period within which the purchaser of a new annuity contract can cancel the contract without having to pay surrender charges.
  • What you should know about the three red flag risks in retirement and how to prepare for them.
  • Agents or brokers selling annuities need to hold a state-issued life insurance license, and also a securities license in the case of variable annuities.

Annuities are an especially good planning tool for married couples in which just one spouse requires long-term care. This could be nursing home care or in-home care, assisted living assistance, or adult day care through a HCBS Medicaid Waiver. When just one spouse is an applicant, the non-applicant spouse’s income is disregarded; only the applicant’s income is counted towards the income limit.

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