With retirement just a few years away, you might discover yourself to be contributing heavily into your retirement portfolio. You want to get as much tax shelter as possible to help your financial savings grow. Perhaps you are ready for a Single Premium Deferred Annuity (SPDA) as a diversificaton from stocks, bonds and mutual funds.
If you do not want to obtain income from an annuity right away (i.e. an immediate annuity), let your investment grow using an SPDA. during the growth phase, all of the income is tax-deferred.Tax deferral is always a method to experience tax shelter.
An annuity is an investment vehicle that may give you a month-to-month income for lifetime once you opt to take the income. It provides tax shelter since your money increases tax deferred. Only your contribution's earnings are subject to taxes and then only once you withdraw it as payments.
Who can invest in an SPDA?
If you have already attended to your life insurance coverage and investment needs, have fully contributed to an Individual retirement account, a 401(k) or other tax-deductible investment strategy to maximize those tax shelter options, then an SPDA might be your upcoming tax-advantaged investment. Your contributions are not tax-deductible, however their earnings increase tax-deferred which leaves you richer when it comes time to receive payments. The tax deferral aspect results in a larger balance and therefore larger payments.
And then once more, with an SPDA, you are ensuring yourself an income stream for life - or at least for those later years. The longer you wait to commence withdrawals, the greater will be its growth, and the larger your monthly payments will be for all those remaining years. Once you eventually do take the cash, if your contract is annuitized, only a portion of every payment will be taxed which means you enjoy another type of tax shelter during the distribution phase.
But until you setup a permanent withdrawal strategy, you can take money from the SPDA as you choose. Deferred annuities generally possess a provision allowing some cash (perhaps 10% per year) to be withdrawn without penalty.
How about guaranteed interest for my SPDA?
During the accumulation phase, the insurance company usually specifies a guaranteed interest rate for one to a number of years, after which it can reset the rate to reflect the most recent market circumstances. There's usually a minimum guaranteed interest rate the annuity will pay. Try to look for the most favorable guarantee you can get from the financially sound company. To lock in a fixed interest rate for many years you can choose a multi-year guarantee annuity.
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I have been debating the pros and cons of SPDA. Thanks for this post, it has helped me make a decision.