Immediate annuities are often used when someone wants to receive a constant flow of income over a specified period of time. For example, you might use an annuity if you would like to receive a set amount of income monthly, quarterly, or annually over the next 10 years. When the 10 years is over, all the money paid into the immediate annuity contract would have been paid back to you, plus any earnings.
The major benefit of an immediate annuity is the tax advantage of the income you receive. Since most of the income you receive from an immediate annuity is a return of your principal, very little is taxable income if the money non-qualified. In the case of a qualified annuity, such as an IRA, the entire withdrawal will be taxable at your ordinary income tax rate. If you hypothetically contributed $100,000 into a 5 year immediate annuity, you could receive $27,000 annually over those 5 years. Approximately 8% of that would be taxable, and the remaining 92% would be non-taxable. Of the $27,000 you were receiving, you would only be required to pay taxes on $2160 of it.*
Most immediate annuity contracts are irrevocable, and this is an important point to consider with this option. Once the income stream is set up the income is guaranteed to you for the period of the contract, but this cannot be changed. If you pass away during the specified period, your beneficiaries will continue to receive the income during the remaining time in the contract. For example, if you choose a 10 year payout option in an immediate annuity and you pass away after 2 years, the insurance company will pay the beneficiaries the same amount you were receiving over the 8 years left in the contract.
Immediate annuities are generally best suited for people who would like to receive guaranteed tax-advantaged income over a certain period of years. Insurance companies offer many different specified period choices, including 5, 7, 10, 20, and 30 years. Most also offer lifetime payout options, with payment amounts based on life expectancy. With this option, you receive payments until you pass away even if you outlive your life expectancy. To determine if an immediate annuity may be right for you, please contact us. *Hypothetical examples may not be based on current rates.
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