|
|
|
|
|
Immediate vs. Deferred Annuities
|
|
|
The difference is all in the timing: income now or income
later.
|
If you buy an
annuity
, you can convert your
assets
into a stream of income and receive that income in regular
payments during your lifetime. This feature distinguishes annuities from other individual
retirement plans, such as traditional individual retirement accounts, which require
you to make required withdrawals after you turn 72. However, if you turned 70½ before
December 31, 2019, you must still make required withdrawals at 70½.
Annuities also differ from other retirement plans because you can choose between
an immediate annuity if you want the income right away, and a
deferred annuity
if you want to build your account value over time and
convert it to income in the future.
|
|
IMMEDIATE ANNUITIES When you buy
an immediate annuity, you make a single lump-sum payment and set the starting date
for the payout to begin sometime within the next 13 months — generally sooner
rather than later. The term,
or period of time that will be covered, and the amount you'll receive are laid out
in the annuity contract.
With an immediate annuity, you control the term: You can choose income for your
lifetime (known as a life annuity), or for your lifetime and that of another person
(known as a joint and survivor annuity). You can add a guaranteed period to either
of these lifetime income payment options so that your
beneficiaries will receive the payments remaining in the guaranteed
period if you die before the end of the period. You can also choose one of the time-specific
or amount-specific payout alternatives.
|
|
WHAT YOU GETThe size of the monthly
payment you'll receive is set by the annuity provider based on:
- The amount you use to buy the annuity, or
annuity principal
- The payout option you choose
- Whether the annuity is
fixed or
variable
- Personal factors, including your age and, if it's a joint and survivor annuity,
the age of the other person
THE IMMEDIATE APPEAL Immediate
annuities offer some advantages that can make them attractive choices for retirement
income. Specifically, they can help ease the fears people may have about managing
a diversified investment portfolio or, even more scary, of outliving their resources.
For example, someone who has just received a large sum of money — an inheritance,
a bonus, or profits from selling a business — but really needs a steady source
of income can choose an immediate annuity. In addition, annuity advocates suggest
that people who expect a lump-sum pension or
401(k) distribution should consider an annuity as a way to convert
their money into a stream of income they can't outlive.
|
|
|
|
DEFERRED ANNUITIES A deferred
annuity gives you the opportunity to build your retirement savings over a period
of years. What you're deferring is the time at which you begin to receive income.
In the period between signing the contract and converting your accumulated assets
to a revenue stream, your principal is in either a fixed account, variable separate
account funds, or both.
Unlike an immediate annuity, which you must purchase with a lump sum, you can build
your deferred account with a lump sum, a series of payments over time, or both.
The ability to combine one-time and periodic contributions may give you added flexibility
in building a larger retirement resource. But that alternative isn't always available.
You continue to have access to your money in a deferred annuity until you convert
your accumulated assets to a revenue stream. This means you can make limited annual
withdrawals, or surrender the contract entirely, getting back its current value
minus any surrender fees. But if you do withdraw, the money will be gone, and your
retirement account will be reduced. You may also have to pay taxes on any increase
in value and an early withdrawal penalty if you're younger than 59½.
IT CAN PAY TO WAIT Deferred annuities
are especially appealing if you've put as much into your employer's
salary reduction plan as you can but want to put away more for your
retirement. And if you aren't earning income, a deferred annuity is one way for
unearned income from your investments or other sources to grow tax deferred.
There are no federally imposed annual limits to the amount you can contribute to
a deferred annuity you purchase on your own — as there are with employer sponsored
plans and IRAs — so you can contribute more when you have more on hand, for
example as the result of a big bonus, a short-term, high-paying job, or other windfall.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glossary
|
|
|
Interactive Demos
|
|
|
Our Products
|
|
|
|
|
|
|
|
 Try our interactive demo
to find out how contributing to a 401(k) can benefit you.
|
|
|
|
|
|
|
|
|
