Annuities are one of the most popular types of retirement investment vehicles, mostly because of the additional benefits provided by the insurance companies who issue these products. When it comes time to begin taking distributions from your annuity account, you will have several options, some of which may have significantly different results.
If your annuity is designated an IRA, 401(k) or similar tax-advantaged account, it is considered “qualified.” Money in qualified retirement accounts has been deposited without first being taxed. The entire sum will eventually be taxed, but only those portions actually withdrawn will result in tax liability for that year.
Stop or Pause Payments
If you arrange a series of regular installment payments or withdrawals from your annuity, you will get a check for your chosen amount at regular intervals. You will have the ability, however, to stop or pause those withdrawals at any time for any reason, as well as to resume them. However, if you elect to annuitize your account, those payments are fixed and cannot usually be stopped. Annuitization is the process of permanently converting your account value to a fixed stream of payments; and once chosen, this cannot be undone.
Access Remaining Lump Sum
Because installment payment selections can be changed at any time, you retain access to and control over the remaining balance in your annuity account. If you need a larger sum of money than what you received as an installment payment, you can easily withdraw more money. However, in an annuitized contract, any remaining lump sum in your account is forfeited to the insurance company in exchange for the guaranteed payment arrangements.
Change Payment Amount
In addition to being stopped and restarted at will, the size of your installment payments can also be adjusted to suit your changing financial needs. Annuitization, on the other hand, creates a pre-determined stream of income that cannot be manipulated, changed or increased beyond the provisions in place at the time the arrangement was made.
Outliving the Money
Perhaps the most significant advantage to annuitizing your contract is the ability to create a guaranteed income stream that will last forever. All annuities share this characteristic and offer the option of receiving money every month for the remainder of your life, regardless of the performance of the financial markets, political climate or current events. Non-annuitized accounts, on the other hand, can be arranged to send regular monthly distributions but cannot guarantee that income will last forever. Any money remaining in the account is subject to the terms of the specific annuity type, which could expose the balance to volatile stock market and financial conditions. Current events that negatively impact the insurance carrier’s ability to positively invest annuity funds would result in decreased interest rates or even decreased account values for owners of variable annuities.
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