Annuity Retirement Plan: What Is It and How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

If you’re nearing retirement age, you may be wondering what your options are for a retirement plan. One option that you might have heard of is an annuity retirement plan. But what is it? How does it work? And is it the right choice for you? In this guide, we will answer all of those questions and more! We’ll discuss what annuities are, how they work, and the pros and cons of choosing one as your retirement plan.

What is an annuity retirement plan?

An annuity is a financial tool primarily for retirement that systematically liquidates a principal amount over a lifetime through monthly payments to an annuitant. In its conventional sense, an annuity provides a benefit that no other financial instrument can offer: an income that cannot be outlived, regardless of how long the individual’s lifetime lasts.

Additionally, annuities are commonly used to accumulate savings like a 401(k) and IRA, which will be utilized to provide a retirement income.

Types of Annuity Retirement Plans

  • Immediate Annuity: A SPIA is a contract with no cash value (or face value). A contract owner trades a lump sum of money for an immediate, irrevocable sequence of retirement income payments that are guaranteed for the term of the contract.
  • Variable Annuity: A variable annuity is a retirement planning tool that may help you participate in stocks, bonds, and mutual funds. With a variable product, you get all of the potential for gains and risk. Variable annuities have a greater degree of risk than other product types.
  • Fixed Indexed Annuity: An indexed annuity is a retirement product that combines stock market participation with principal protection against volatile market conditions. With tax deferral, your tax-sheltered retirement accounts have the potential to make market gains without any risk of loss.
  • Fixed Annuity: A deferred fixed annuity is a tax-deferred retirement plan that offers a fixed guaranteed interest for the contract term, comparable to a Certificate of Deposit (CD). Your retirement savings will earn a certain, guaranteed amount of interest each year for an agreed-upon length of time. It’s sometimes referred to as a “CD annuity.”
  • Long Term Care Annuity: A Long-Term Care Annuity is a tax-deferred fixed arrangement with greater tax-free benefits to supplement qualified long-term care services and facilities.
  • Deferred Income Annuity: The Deferred Income Annuity (DIA) is a pension-like income program that consumers purchase. A consumer pays a lump sum of money today in exchange for a future, deferred, irrevocable retirement income stream (over a set length of time or lifetime).
  • Qualified Longevity Annuity Contract (QLAC): A Deferred Income Annuity (DIA) is a type of annuity that may be set up to defer RMDs. The Qualified Retirement Savings Plan, or QLAC, is an annuity that has been created exclusively with qualified retirement savings plans to postpone required minimum distributions.
  • Medicaid Annuity: A MCA is a one-of-a-kind SPIA established to financially support an elderly spouse’s lifestyle while their spouse receives Medicaid.

Qualified Annuity and Non-Qualified Annuity

Annuity owners can fund retirement annuities with funds from an IRA, 401(k), or cash. A retirement savings plan that has been authorized by the IRS is known as a qualified annuity and is funded by an IRA and 401(k). You contribute money before taxes are taken out, or transfer an old IRA or 401(k) into a new IRA annuity without tax consequences. Contributions to a qualified annuity are taken from your earnings and placed in the retirement plan to accumulate. Those earnings are not taxed until you withdraw them from the account in retirement.

A non-qualified annuity is a retirement savings plan in which you contribute after-tax funds (cash). Contributions to a non-qualified plan are made with previously taxed funds, and only the interest earned is taxable income.

What Are Not Retirement Annuity Plans?

  • Structured Settlement: A structured settlement is a structured, irreversible series of regular payments from an insurance company that is often authorized by the court as an immediate annuity.
  • Lotto Annuities: Lottery annuities are immediate annuities that distribute an income for thirty years.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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