Taking a Fast Payout From an Annuity—Immediate annuities provide current income
Do you need retirement money sooner or later? It can make a big difference in the way you manage your finances. Take annuities, for example. If you are far away from retirement, you may decide to invest in a deferred annuity. As the name implies, distributions are not made until sometime in the future. The earnings in the annuity compound without any current tax erosion.
On the other hand, if you need current income more than future income, you might opt for an immediate annuity. In the current economic climate, this variation may be preferable for individuals who have already retired or expect to retire in the near future.
How it works: When you invest in an immediate annuity, you could begin receiving checks from the issuer within a matter of weeks. Depending on the annuity contract, checks can be sent on a monthly, quarterly, semiannual or annual basis. In any event, the first annuity payment must be sent before the end of the specified period. Although the amount of each check will not fluctuate, payments depend upon the total annuity investment
As with most other investments, there may be a difference in the return offered by one immediate annuity compared with another. But yield is just one of the factors to consider in this situation. Significantly, you will want to be sure that the insurance company (or other financial institution) issuing the annuity is economically sound and reputable.
How long do the payments for an immediate annuity last? Once again, that depends upon the annuity contract. As a general rule, you can arrange to receive regular payments for a specific number of years or for the rest of your life (or the joint lives of you and a designated beneficiary). Once you decide on the duration of the payments, it will be easier to compare the different rates of return.
Rule of thumb: All things being equal, the longer the time for payments, the less you will receive with each check. In other words, you will receive larger monthly payments if you arrange to receive payments for ten years than if you opt for monthly payments over the course of your lifetime (assuming that your life expectancy is currently greater than ten years).
What are the tax consequences of investing in an immediate annuity? Briefly stated, tax is due on a portion of the payments in the year the payments are received. This is another reason why you might choose a deferred annuity if you are still working on a full-time basis. Once you retire, you may be in a lower tax bracket than you are during the peak of your working career.
Of course, you do not have to figure out things all on your own. Your advisers can help you decide which type of annuity, if any, is suitable for your situation.
For more information on this issue, please call Anita Abrol or Tom Shade at 810-238-4617.