When do you get your annuity money?
An annuity, like a fixed indexed annuity, is a secure option to guarantee income now and in the future—potentially even for your beneficiaries if you set it up as such. Of course, depending on the type of annuity you invest in and the payout option you choose, you may receive your money sooner or later.
We’ll help you discover the different types of annuities and when you can expect to receive your annuity payout.
How do annuities work?
Annuities are contract agreements backed by an insurance company that guarantees you monthly income payments for life, sometimes regardless of market conditions. You can customize your annuity in several ways, factoring in the risk you’re willing to undertake and how you want to pay for your annuity.
Of course, you can customize your annuity by when and how you want to receive your money through Single Premium Immediate Annuities (SPIAs) or deferred annuities.
You can set up both immediate and deferred annuities with a fixed interest rate, one that is adjusted annually for inflation or one that varies based on the performance of the annuity funds in subaccounts.
Single premium immediate annuity
An SPIA, like a traditional annuity, is a contract between you and an insurance company aimed at giving you secure income over a period of time, depending on the terms of the annuity. There is no accumulation phase with an immediate annuity; you start receiving your payments immediately. If not, you’ll usually get your income rolling in within a year of purchasing the annuity.
Remember that SPIAs generally require you to pay the entire annuity premium in a single lump-sum payment. There’s no limit to the amount you can put into an annuity, but you should, of course, factor in the amount you need to keep accessible for living expenses and emergencies.
One example of using an immediate annuity is cashing in your 401(k) as a trade of sorts, trading a lump sum of money for a committed, reliable source of income over time, plus interest. You will receive a portion of your premium in addition to the interest your annuity generates over time.
Immediate annuities only account for a small portion of annuities sold, and it’s for a pretty simple reason: not everyone can afford to pay the upfront lump-sum price of purchasing an annuity. Typically, those purchasing this type are retired or are about to retire. Of course, there are also other market factors.
According to some financial analysts, brokers tend to prompt consumers toward more complex annuities that, while promising, aren’t as consistently profitable as immediate annuities. If you have a hefty amount saved up in your 401(k) or a significant retirement fund, an immediate annuity might be a wise option to safeguard your wealth, both now and potentially for your beneficiaries.
Doing so can supplement the income you already get from sources such as social security or your pension. That’s why some retirees choose to input their 401(k) into an annuity to guarantee substantial income throughout retirement.
Of course, there’s also a level of customization involved in immediate annuities. You can, for example, change how often you receive payments, whether it be monthly, quarterly, or annually.
Keep in mind that your annuity will be taxed since it is a form of taxable income unless you specifically have a non-qualified annuity, a portion of which constitutes return of principal: a nontaxable source.
Be aware of the annuity tax in your specific state. Some will issue a premium tax on annuities specifically, meaning that you will need to pay the premium, associated fees, and the premium tax when you pay your lump sum for the immediate annuity.
A deferred annuity is also a contract with an insurance agency, except in this case, you receive your money at a later set date rather than immediately. The reasons for getting the annuity are often the same: to supplement income and protect wealth, but the methodology is a bit different.
A deferred annuity allows you to start making regular premium payments rather than having to pay an entire lump sum at once; the payout will be returned to you beginning on the scheduled payout date. You can receive your money all at once or in regular increments.
A flexible premium payment schedule gives you more money flexibility during the short term and time to think about the best annuity plan for your future. On the downside, you might not get the guaranteed rate of return you would with a lump-sum deferred annuity, and there may be limits to the amount you can put into your annuity over time, especially as you approach the payout period.
Of course, if you prefer, you can purchase a deferred annuity in a lump sum, too, known as a single premium annuity. You get a guaranteed rate of return with principal protection, but if you are going to set up a deferred annuity, make sure you don’t need the money anytime soon. Should you need to withdraw it sooner, you may be subject to additional charges.
The main advantage of deferred annuities is relatively simple: the longer you wait to withdraw your money, the more interest it collects, increasing the amount you get from your stream of payments.
Perhaps the greatest benefit of deferred annuity is for those in high tax brackets. Moving money into a deferred annuity protects it from being taxed until later (tax-deferred). When you retire, you’ll likely be in a different tax bracket, meaning that you surrender less of your hard-earned money to taxes when you withdraw. As such, annuity buyers who wish to invest in tax-deferred retirement vehicles or supplement their income during retirement may choose a deferred annuity.
The bottom line
With any investment, individuals are often thinking about the bottom line. In other words, “How long will it be until this annuity starts to benefit me?” Two main types of annuities differentiate by payout: immediate annuities and deferred annuities.
The former allows you to immediately protect your money and receive a regular income, while the latter defers those payments until later, often proving beneficial for individuals in a high tax bracket. Consult your trusted insurance agency today to see what annuity options they offer and discover which one is right for you!