An annuity is an insurance contract that guarantees an income. This tool is a way to save money for retirement by increasing your investment portfolio and simultaneously deferring taxes on growth. You choose a series of payments or withdraw whenever you need to. Benefit payments start within a year. There are deferred annuities, including fixed or variable deferred annuities, and immediate annuities. Choosing to withdraw a lump sum is the bailout.
A bailout provision is a clause in the contract of your annuity that allows you to withdraw your money without any penalties based on predetermined conditions. Some annuity contracts include a medical bailout provision for nursing home expenses or if you become terminally ill. Once your annuity expires, on the maturity date you have the option to either renew or surrender the annuity. If you surrender at this time, you do not pay charges. Choosing to renew may reinstate all charges. Some annuities have a charge so that your beneficiaries will not receive the full amount. Should the current interest rate drop, there may not be a surrender charge; this is referred to as a bailout option. This interest rate drop bailout feature becomes a waiver of penalties.
Investing Your Bailout
A word of caution: According to the Financial Times, if you are less than 59 1/2 years old and you use your annuity to invest in anything other than another annuity, you will have to pay federal income tax penalty. If you cash out too soon, you will pay a surrender charge of 7 percent.
Options for reinvesting your annuity bailout are varied. Money markets are for short-term investing. Quick turnarounds are sure ways to get a return on your investment and are FDIC insured. Money markets may ask for a specific balance amount. Treasury bills are low risk. Backed by the government, you can decide the maturity date. Use short-term treasury bills with a maximum life of 26 weeks.
You go to your bank to purchase certificates of deposit, or CDs. The maturity dates are already set, and the interest rate is locked. Withdrawing your money early might have penalties. An employer’s 401k plan is a long-term investment. You decide which funds you want to invest in and the type of risk.
Savings bonds are risk free but offer low interest and return. Mutual funds are low risk and managed by a fund specialist who invests your money in different stocks or mutual funds. You pay administrative fees for this service.