![]() ![]() On the other hand, a series of payments might be more beneficial for younger investors who want to grow wealth over time in order to have future income in retirement. Also called "immediate annuities" because their distribution, or payout, of income is almost immediate, they have very short accumulation phases as a result. This allows them to start receiving distributions that are usually guaranteed for life right away. A lump sum is more commonly chosen by investors close to or already in retirement in order to start the annuitization and payout phase as quickly as possible. Funds can come in the form of one lump sum or a series of payments, and there is precise reasoning for both methods. There are several ways this can be accomplished the most common method is to transfer funds, usually by check or bank transfer. It always comes first and begins after an initial investment is made. The accumulation phase is the first stage during which an annuity builds up cash value utilizing gathered funds. There are several phases in the life of an annuity: the accumulation, annuitization, and payout phases. In addition, some contracts offer benefits for using penalty-free withdrawals to pay for long-term care expenses. For example, the annuitants become disabled, suffer a major medical emergency, or are diagnosed with a terminal illness. ![]() Also, as retirement accounts, annuities allow early withdrawals without penalty under certain situations. ![]() Other annuity contracts may allow the withdrawal of the gains (not principal) from an annuity without penalty. Most annuity contracts allow the withdrawal of a portion of the account value each year without incurring a surrender charge. With that said, however, there are exceptions. 13, 1982, earnings are paid out before principal. Because withdrawals are taxed on a "last in, first out" (LIFO) basis for a non-qualified annuity purchased after Aug. ![]() For all types of annuities, earnings are not taxable until the money is withdrawn. Withdrawals from an annuity before the age of 59 ½ will result in a 10% early withdrawal penalty on top of regular income tax. There is no limit on the amount of non-qualified money that can be placed into an annuity or the number of annuities that can be purchased. A big distinction to make is that, unlike qualified annuities, non-qualified annuities are not subject to minimum distribution rules after the age of 72. In other words, the only portion of a non-qualified annuity policy that is eligible for taxation is the earnings, which are taxed as ordinary income. These annuities are purchased with after-tax dollars. With that said, features that are unique to annuities such as guaranteed death benefits (benefits that must be paid out to beneficiaries regardless of factors such as down markets and decreases in account value) may still be included. However, the rules of the annuity plan still govern all matters and may override certain rules. When used as a form of retirement savings, these annuities are entitled to the tax benefits and penalties of their respective plans. However, the eventual distributions during a future tax year are subject to ordinary income taxes. This means that contributions during a tax year can be deductible, lowering taxable income. Contributions to qualified annuities are generally paid with pretax money, including any investments purchased for use in a qualified retirement plan, and are not included in taxable income for the year in which they are paid. Less common qualified retirement plans include defined benefit pension plans, 403(b)s (similar to 401(k)s), Keogh Plans, Thrift Savings Plans (TSPs), and Simplified Employee Pensions (SEPs). In the U.S., a tax-qualified annuity is one used for qualified, tax-advantaged retirement plans such as an IRA or 401(k). Related Annuity Calculator | Retirement Calculator ![]()
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