Can an Annuity Be Owned by a Business?

An annuity is a customizable insurance contract that enables you to receive a set amount of money at regular intervals for a specified period. Annuities can also provide payments until you die.

And because an annuity has no contribution limits and the investments can grow tax-deferred, it works well as a form of additional retirement income for savvy individuals who can choose to invest them through their IRAs and 401(k)s. However, annuities don’t always have to be owned by individuals. It is possible to have a business annuity too.

How an annuity is categorized depends on when they begin to provide payments, how long the benefits last and how the investment grows. For example, lifetime annuities will guarantee you an income until your death. On the other hand, fixed-period annuities will guarantee you a payment for a specified period, which may be as long as ​20 to 30 years.​

Below are other main types of annuities.

A fixed annuity offers a guaranteed interest rate. The rate may vary from one year to the next or remain constant for a set period. Therefore, the insurer guarantees a fixed payment in the future.

Insurance companies tend to invest fixed annuities in reliable investments, such as U.S. Treasury securities and trustworthy corporate bonds. For this reason, they are excellent for investors who have low risk tolerance and hate dealing with market volatility. However, their returns tend to be the weakest among all types of annuities. In addition, a fixed annuity may end up underperforming compared to inflation.

A fixed index annuity will provide you with a guaranteed minimum interest rate. Its goal is to preserve the premium. And the interest rate is pegged on a market index, which may include the S&P 500 index.

Unfortunately, it comes with a cap that limits your returns. So, your ability to make more money is hindered. You should opt for this kind of annuity if you have a low tolerance for risk but still desire some market exposure.

A variable annuity usually invests in different portfolios of mutual funds. You get to select those funds. Typically, a variable annuity doesn’t guarantee a return. And your principal is not guaranteed either. It’s your investments’ performance that determines the payout.

But you need some degree of risk-tolerance because mutual funds can also perform poorly. However, if you also buy a rider, you can lock in a guaranteed retirement income to safeguard you against market volatility.

An immediate annuity is usually funded with a single lump payment and offers guaranteed regular income for your entire lifetime or a set period. These may begin within one to 12 months after you buy the annuity.

In addition, payments tend to be higher than other annuities because they include both interest and principal. There’s no doubt that you will be giving up liquidity, but you will gain a guaranteed retirement income in return.

A deferred annuity will delay payments for at least a year before allowing you to collect them. You can even defer the benefits for decades before receiving your guaranteed income. Then you will get it in the form of a lump sum or monthly payments.

The longer the annuity remains invested, the more money you will make. Also, during that period, your earnings will grow tax-free until you begin making withdrawals. However, you may end up dying before receiving any of that money. So, that’s something to think about.

A corporation cannot be an annuitant. An annuitant is someone who receives annuity benefits and must be a natural person whose life expectancy is used to calculate payouts. Since corporations do not have a human life expectancy, they cannot be annuitants.

Business partnerships and corporations can own annuities as annuity owners.

An annuity owner is someone who determines the contract terms, including the date the payouts begin and when they end. Annuity owners can also name the beneficiaries of the payouts, terminate the annuity and have the responsibility of paying the premiums.

Remember, though, that businesses that own annuities cannot defer taxes. They must pay the income taxes annually. For this reason, using them to reduce your taxes may be illegal. That said, businesses can get around some of these challenges by including them among their business pension options. Below are two popular ways of doing that.

You can have a corporate-owned annuity by funding a Savings Incentive Match Plan (SIMPLE-IRA) as a small business owner. Your business should have 100 or fewer employees who earned ​$5,000​ or more the previous year for your business to be eligible for this plan. In addition, your business should not have any other retirement plans.

Each employee can pay their contributions toward an annuity. In such cases, the insurance annuity companies can act as the custodians of your plan. And while there are no additional tax advantages available when you use the qualified plan to buy annuities, employee contributions to this plan are usually tax-deductible. And each one can contribute up to ​$13,500​ a year currently. However, the maximum limit for all plans combined must not exceed ​$19,500​.

In addition, as the employer, you can make non-elective or matching contributions to each eligible employee’s account. You could match the contributions on a dollar-for-dollar basis up to three percent of the employee’s compensation so long as the amount doesn’t exceed ​$290,000​. So, if you are self-employed, owning a business annuity can be an excellent way of increasing your retirement income.

Your business can also own annuities via a Simplified Employee Pension Plan (SEP-IRA). It works like a traditional IRA and follows similar rules. And contributions can be made to annuity companies as the custodians of the plan.

Even if you have a second job, you can set up a SEP-IRA for your self-employed business. But you must be at least 21 years old and must have worked for your business for at least three of the last five years. In addition, you should have earned ​$650​ in 2021 and ​$600​ annually between 2016 and 2020.

Considering that employees’ contributions could be ​25 percent​ of their compensation, or up to ​$58,000​, whichever is lesser, the SEP-IRA can be an excellent tool for increasing your annuity investments.

Also, note that if an LLC is taxed as a partnership, you are considered an employee of that partnership if you are a member or partner.

You can structure trusts to own annuities. You can do this by making the trust the annuity owner. Alternatively, you can make a trust the beneficiary of the annuity. Everything depends on what kind of trust you set up and how you want to distribute your payouts.

Unlike businesses, trusts can be annuitants. In addition, they get to enjoy the tax-deferral benefits so long as they act as an agent for a natural person.

When businesses own annuities, they may not always enjoy the tax advantages. So, it’s essential to consult a financial planner and tax advisor if you intend to get a corporate-owned annuity because they know how annuities work. It would also be wise to do the same if you want to own an annuity through a trust. Things can get complicated quite fast if you use the wrong methods to buy annuities for retirement or choose the wrong type.