Are you considering using an annuity to provide income during your retirement? That could be a good idea, depending on your needs and objectives. Annuities can be a helpful tool to create predictable, reliable income that lasts through your retirement years.
Annuities can generate income via two different methods: annuitization or withdrawals. With annuitization, you contribute a lump sum into the annuity policy. The insurance company then converts that lump sum into a lifetime guaranteed stream of income based on your age and other factors. You lose access to the lump sum, but you receive a stream of income that’s guaranteed for life.
Although annuitization can be useful in the right situation, many people prefer to generate income through withdrawals. When you take withdrawals, you don’t necessarily lose access to your premiums or account value. Your premiums aren’t converted into income. Rather, your withdrawals are deducted from your account value.
Not sure how annuity withdrawals work? Below are a few common questions about annuity withdrawals and how they can work for you in retirement. Make sure you do your due diligence and understand how your annuity works before moving forward.
Are withdrawals guaranteed*?
One of the benefits of annuitization is that the income is guaranteed for life. Many people find that stability and security appealing. However, you don’t necessarily need annuitization to generate guaranteed income. You may be able to achieve the same objective through withdrawals.
Many deferred annuities offer optional benefits that provide guaranteed income for life. The feature specifies a guaranteed withdrawal rate, such as 5 percent of the annuity value or of your initial premium. As long as your annual withdrawal never exceeds that limit, the withdrawal is guaranteed for life, even if your account value decreases over time. Be aware that these optional benefits also usually come with additional fees.
How much income can you take?
There’s a common perception that annuities don’t have liquidity. Annuities may be less liquid than other vehicles, but they aren’t completely illiquid. Many annuities allow a certain withdrawal amount every year without incurring penalties.
As mentioned earlier, you could have an optional benefit that specifies a maximum withdrawal that’s guaranteed for life. If you have one of those benefits, you likely won’t want to exceed the guaranteed withdrawal amount.
If you don’t have an optional withdrawal benefit, you will likely have a maximum “free” withdrawal amount that you’re allowed to take each year without penalty. These amounts are often set at 10 percent of the contract’s value. If you exceed that amount in any year, you may have to pay a surrender penalty on the excess amount. Once the surrender period is over, there aren’t any penalties on withdrawals.
Are annuity withdrawals taxable?
Your withdrawals from your annuity may be taxed, depending on how the annuity is structured. If the annuity exists inside an IRA, the taxation rules of the IRA govern the annuity. For example, if the annuity is in a traditional IRA, withdrawals will likely be taxable. If the annuity is in a Roth IRA, withdrawals may be tax-free.
If your annuity is not in an IRA, the taxation depends on what type of money is being withdrawn. Growth comes out first and is taxable. If your withdrawal consists entirely of growth, it will likely be taxable. If your withdrawal consists of premiums, it won’t be taxable. A withdrawal that’s a blend of growth and principal would be partially taxable.
Interested in learning more about annuities and how they can benefit your retirement? Let’s talk about it. Contact us today at Carstens Financial Group. We can help you analyze your needs and develop a strategy. Let’s connect soon.
*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity
Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
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