Retirees looking for a vehicle to supply retirement income often consider annuities - specifically the immediate annuity. Though retirees may have specific arrangements set up for funding an immediate annuity, they should be prepared to go purchase the best paying annuity they can.
An immediate annuity is a guaranteed series of payments that can continue for a set number of years or one or more lifetimes. The promise of a steady, predictable income that you can't outlive is very attractive - and a unique character of the annuity as an investment.
With the boomers starting to retire, financial firms are aiming to attract more annuity customers with competitive deals. Because of this you must be sure you shop around within the immediate annuity market for the best deal. Beginning an immediate annuity is a permanent decision, so getting the best payout for your money is important
Typically, immediate annuities are purchased in one of three ways. One way is with a lump-sum payment that the purchaser transfers to the annuity company to buy his 'stream of income'. This lump sum may come from a retirement plan distribution, a personal injury settlement, or a divorce as examples.
Another way is by simply annuitizing a deferred annuity you've been contributing to over the years. Annuitization means converting the value of the deferred annuity into an immediate annuity.
Lastly you can fund your immediate annuity through the terminal funding of your retirement plan. Some retirement plans terminate their liability to the participant by transferring the plan's value to an insurance company. When a retirement plan pays out this way it creates a special kind of "qualified immediate" annuity requiring no taxation on the transfer, but all payments are fully taxed as income.
But be sure you recognize your choice to choose the best annuity company you can find for each of these options. So, if you own a tax-deferred annuity and want to annuitize, you aren't limited to the payout offered by your own insurance company. You can still shop for the best deal offered by competing companies. You need only complete a tax-free (IRS Section 1035) transfer to the company that offers the best terms.
Even if your retirement plan offers only one insurance company for terminal funding, you can still shop for others and then transfer the money to the vendor you think is most suitable for you.
Because of the competitiveness in this industry, shopping around is the wise approach. If you want information on annuity payouts, just give us a call or fill out the card so we can get it to you.
Realize that income from annuitization is taxed partly as ordinary income and partly as return of capital - i.e. the premium you paid for the annuity.