Choosing deferred annuities can have many advantages as a pre-retirement tool.
Benefits of deferred annuities
Deferred annuities are insurance contracts that provide interest to the investor and the interest is not taxed until withdrawn. The deposit into your deferred annuity is money that has been taxed, so later, when you get payments, part of those payments are tax free return of principal. (You can also invest IRA money in a deferred annuity and then all distributions will be taxable. These are called "qualified annuities)."
You can invest in deferred annuities either by way of a series of payments or you can choose to acquire deferred annuities with a one-time payment. This investment within deferred annuities will continue to grow, while tax payments may be deferred to a later point. The principal invested in deferred fixed annuities is guaranteed by the issuing insurance company creating an appeal for conservative investors. Therefore, deferred annuities are a good retirement savings vehicle for pre-retirees.
Once retired, there are also different options to taking your money from deferred annuities:
• Surrendering the fixed deferred annuity for a lump-sum (not a typical option as most people don't like paying all the accrued annuity tax as a lump sum)
• Receiving payments from annuity over the fixed number of years and if the investor dies prior to the fixed period term, the named beneficiary receives the remaining payments.
• The investor receives payments for life, from the fixed annuity. The payments continue for as long, or short, as the annuitant lives
• Some insurance companies offer a combination of both options mentioned above.
• A joint and survivor annuity option ensures that both the investor and partner receive payments for life. When the first spouse dies, the survivor continues to get the payments for their lifetime.
Here are a few additional valuable pointers for those approaching as well as beginning their retirement.
- Should you leave your deferred annuity to heirs, it will pass to them without probate. Like your IRA, it passes to the beneficiaries named, not what you have in your will or living trust. The beneficiaries will pay tax on accumulated income as they receive annuity payments.
- You can move your funds from one annuity company to another without a taxable event
- There are a number of other features present in most deferred annuities that your agent can explain such as the terminal illness waiver, the nursing home waiver, commutation of an annuitized contract and even long term care benefits.