Advanced Section

Have you purchased annuities in the past? This ADVANCED section is dedicated to you. Please click on the question below to view the answers to the Frequently Asked Questions (FAQ). For more information, click the button below and complete the form to receive your free report from Annuity Associates.

The Advanced Guide to Annuities

At Annuity Associates, one of our main goals is to educate our clients so that they can make the best possible decisions for themselves and their families.
If you are already familiar with annuities, you probably have questions about how to maximize your upside. Maybe you’re considering whether to begin receiving payouts or how to reduce the tax burden in estate planning. Below are the answers to some frequently asked questions so you can make the most of your purchase.

Exchanging your current annuity for a new one might be an option for you. However, you should read all the terms and conditions on your current policy to know what fees may apply.

Every annuity has a surrender period — a timeframe during which you have to pay a fee (known as a surrender charge) if you sell or withdraw money from the account. Most surrender periods are between 5 and 10 years, but every contract is different.

IRS code 1035 allows you to exchange your old annuity for a new one without incurring any new taxes. While this may be a good deal, you will likely start a new surrender period. Even if you were past the surrender period on your first annuity and able to withdraw money without a surrender charge, you would have to wait to do the same on your new policy.

Your best bet if you have an annuity that you’re not satisfied with is to talk to a financial professional to review your options.

Most annuities assume that their buyers are in good health and will live out an average life expectancy. If you are in poor health or have a lower than average life expectancy, you may want to purchase a fixed-period annuity as opposed to a policy for life. An annuity for 5, 10, or 20 years can help give you the security of a retirement income while making sure you don’t leave money on the table.

If you are in poor health and your spouse is healthy or vice versa, purchasing two separate annuities as opposed to a joint one may offer a better combined financial upside. Your licensed agent can help make sure you’re both protected.

More and more 401(K) plans are adding annuities as options now that the 2019 SECURE Act has passed Congress. However, the annuity options that your 401(K) offers may not reflect the options in the commercial marketplace or may have a structure that doesn’t work for you. 401(K) plan managers often aren’t skilled at helping you select an annuity that’s right for you.

Shopping the market means you can spot the best rates rather than settling for one. Only once you learn more about your available policies can you make an informed decision about the best choice.

While IRAs offer many tax benefits in saving for retirement, you are required to start taking minimum payments from the first April after you turn 72. If you plan to continue working past 72, this can cause a big tax headache by pushing you into a higher income bracket.

Instead, consider putting the proceeds of your IRA into an immediate annuity. You can continue to receive tax benefits while ensuring a guaranteed retirement income. It’s best to pursue this strategy under the guidance of a financial professional, however. Different rules and caveats apply depending on the type of IRA and the type of annuity.

Annuities are generally subject to estate tax. Additionally, the annuity payments to your heirs will be taxed as income. However, an annuity can still be a lovely legacy to leave behind and an estate planning attorney can help you with the tax implications.

Once you annuitize your annuity, that is, begin to receive regular income payments from your annuity, you cannot adjust your payments or withdraw money from the principal. A financial professional can help you decide the best time to annuitize and make sure you take advantage of the flexibility to make changes in your policy before then.

No. Income riders typically incur an additional fee and have to be included in your initial annuity contract. They cannot be added to an existing contract or policy.

Income riders are optional features that you can include in an annuity contract to provide you with a guaranteed income past a certain date. Typically, income riders pay you a particular percentage of a benefit base. For instance, if you have a benefit base of $50,000 and your income rider pays you 5%, you would earn $2,500 a year.

Income riders can also increase your benefit base automatically. For instance, if your $50,000 contract had a rider that offered 6% growth compounded annually, your benefit base would be $53,000 after the first year. You cannot make a lump sum withdrawal against the increased amount like you might be able to with a CD, but you will receive your income based on that amount.

Death benefit riders are another type of rider you might wish to include in your policy. This can allow you to pay for your final expenses so your family doesn’t have to pay out of pocket. You can also pass along a lump sum or continuing payments to an heir or a charitable organization. Many people find death benefit riders helpful since you can pass along money to a beneficiary without them having to go through the lengthy process of probate.

Riders are typically separate calculations within your contract. If you have a deferred annuity, your policy statement will usually list your investment value, your surrender value, and your rider value.

Riders generally come with additional fees. A financial professional can help you choose the riders you need while minimizing additional fees.

Some annuities offer a fixed income increase every year. For example, you might receive a 2% increase in your income payment every year independent of any inflation or increase in the cost of living.

Other annuities offer increases in annual income based off the consumer price index (CPI). Typically, these increases have a maximum level they do not exceed. One downside is that these policies generally start off with much lower income payments. It will take a number of years for your income payments to reach the level they would have if you had had an annuity with no cost of living increase. This is something to keep in mind if you have major financial goals like taking a trip or buying a new home in your early retirement.

The CPI is also a general measure that doesn’t reflect everyone’s situation, especially if you anticipate large increases in medical costs as you age or if you are planning on retiring to an area with a much different cost of living.

Determining whether you want a policy that increases income payouts and what kind of increase you want is tricky and can have major consequences for your retirement. An Annuity Associates professional will help you find an option that provides you with financial security.

If your annuity is still in the accumulation phase and hasn’t yet started to pay out, current IRS regulations allow you a few ways to transfer your annuity without a tax penalty.

Though there may not be a tax attached to the transfer, you still may have to pay a surrender fee to your current company. Make sure to read your contract thoroughly before any transfer so that you understand any costs involved.

If you’re looking for a place to put your money over a longer period of time, a single premium deferred annuity, or SPDA can be a better choice than a savings account or a CD. You can defer tax payments while your money is in the growth phase, lock in a higher rate of return than you might get with a CD, and have a guaranteed income stream after you make the decision to annuitize.

Currently, IRS code 1035 allows you to roll over an SPDA to a different company tax-free. So, if you are considering annuitizing your SPDA, it pays to shop around and find a company that offers you the best terms and rates.

Annuitizing an SPDA can affect your liquidity and other forms of retirement income, so it’s good to consult with a financial professional to make sure you understand all the implications. Annuity Associates can put you in touch with someone familiar with annuitizing SPDAs.

If you have designated a beneficiary to continue receiving your payments after you die, those payments will be taxed as income.

The value of your annuity at the time of your death is an asset of your estate. If your policy passes to your spouse, they can decide to put the account in their name. This allows them to continue to defer taxes until they decide to collect on the benefits.

If the annuity is inherited by someone who isn’t your spouse, the value of your policy is subject to estate tax.

Even with tax implications, annuities can still be a good way to pass on your assets, since your beneficiary will not have to go through probate to collect their payments. With the help of a licensed professional and your estate lawyer, you can structure your contract to maximize the benefits to your heirs.

If your annuity income payments suddenly change, check the amount of tax being withheld. The IRS updates its tax tables every year and the company holding your policy calculates your withholding based on these tables and the number of dependents you claim on your tax forms.

It’s good practice to double-check your withholding amounts every year with a financial professional.

This depends on a few factors. Generally, if you’ve started receiving payments on your annuity, then your heir must receive payments. They can’t stop payments so the annuity can continue to grow.

Your heir can decide to receive the annuity in a lump sum, full payment over the next 5 years, or payments over their lifetime. If they choose payments over their lifetime, they generally have 60 days to choose that option.

Lump sum payments generally have the largest tax penalty as the whole amount of the annuity minus the amount you paid into it is considered taxable income for your heir. If your heir chooses to receive payments over their lifetime, they generally have less of a tax penalty since the payments are less likely to push them into a higher tax bracket.

If your spouse inherits your policy, they have more flexibility in changing the terms of the annuity. If a non-spouse inherits your annuity, they will have access to the benefits but will not be able to change the terms.

You can determine the value of your annuity at any point in the future by using a compound interest formula.

If we assume that P is the amount you pay into the policy every year, R is the rate of return, and N is the number of periods, you can find future value V by:

V = P*{(((1+R)^N)-1)/R}

Let’s say you pay $1,000 into your annuity every year and your rate of return is 5%. You’d like to find out what your policy will be worth in 10 years. The equation would be:

V = 1000*{(((1+.05)^10)-1)/.05}

The future value of the account is $12,560. The compounded 5% return has earned you $560, or almost 5% more than if you’d just put the cash under your mattress. The bigger your yearly contribution, the more you benefit from compound interest.

The above formula assumes a typical annuity where the payments are made at the end of the period. If you have an annuity due, where the payments are made at the beginning of a period, simply multiply the value by 1+R.

So, if your 5% annuity was an annuity due, you would use the equation V = 1000{(((1+.05)^10)-1)/.05} *(1.05). The amount after 10 years is $13,188.

Don’t worry if these equations are giving you bad flashbacks of high school math. A financial professional can help make sure you harness the full benefit of compound interest.

At Annuity Associates, we know annuities can be confusing. Our professionals can help you learn more about your options to ensure financial security in your retirement.

An initial consultation with us is free, and you have no obligation to purchase any annuity product through us. Get in touch to learn more.