What To Know About Deferred Annuities

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What Is A Deferred Annuity And How Does it Work?

A deferred annuity is an investment designed to grow your funds tax-deferred until you withdraw them, typically during retirement. You make either a lump-sum payment or a series of payments, and your money grows over time. When you retire, you can convert your accumulated funds into a steady income stream.

 Deferred Annuity

Types Of Tax-Deferred Annuities

Deferred Fixed Annuities

These annuities guarantee a fixed interest rate for a specific period, providing stable and predictable growth. They are ideal for those seeking a low-risk investment option.

Multi-Year Guaranteed Annuities (MYGA)

MYGAs offer a fixed interest rate for multiple years, usually ranging from three to ten years. They provide higher interest rates than traditional savings accounts or CDs, making them attractive for long-term planners.

  • Pros: Offers guaranteed interest rates for a fixed period, making it a stable and predictable investment.
  • Cons: Lower potential returns compared to more aggressive investment options.

Fixed Index Annuities

Fixed index annuities are tied to a market index, such as the S&P 500. They offer the potential for higher returns based on market performance while protecting your principal from market losses.

  • Pros: Provides potential for higher returns linked to market indices while protecting the principal.
  • Cons: Caps and participation rates can limit the amount of growth you can achieve.

Registered Index-Linked Annuities (RILA)

RILA annuities are similar to fixed index annuities but offer even greater potential returns by allowing more direct participation in market gains. They also come with downside protection, limiting your losses in a market downturn.

Long-Term Care Annuities

These annuities combine the benefits of a deferred annuity with long-term care insurance. They provide a way to pay for long-term care expenses, offering retirement income and protection against future healthcare costs.

Variable Annuities

Variable annuities allow you to invest in various sub-accounts, similar to mutual funds. The returns are not guaranteed and depend on the performance of your chosen investments, offering the potential for higher growth but with higher risk.

  • Pros: Offers the potential for higher returns through investment in various sub-accounts similar to mutual funds.
  • Cons: Higher risk due to market fluctuations and higher fees.

Advanced Life Deferred Annuity

An advanced life deferred annuity (ALDA) provides guaranteed lifetime income starting at a later age, typically around 80 or 85, to help mitigate the risk of outliving your savings.

  • Pros: Acts as longevity insurance and provides predictable supplemental income that is guaranteed for life
  • Cons: Can have high costs and fees while being illiquid.

Premium Deferred Annuities

Flexible Premium Deferred Annuity (FPDA)

Allows multiple contributions over time, providing flexibility in how you fund the annuity.

Pros:

  • Flexibility to make additional contributions as you can afford them.
  • Tax-deferred growth on all contributions.
  • Can help build retirement savings gradually.

Cons:

  • Requires ongoing financial commitment to maximize benefits.
  • Typically, lower initial interest rates compared to SPDAs.
  • Potential surrender charges for early withdrawals.

Single Premium Deferred Annuity (SPDA)

This type of annuity involves a one-time lump sum payment that grows tax-deferred until you start receiving payments.

Pros:

  • Simple to manage with only one initial payment.
  • Tax-deferred growth until withdrawals begin.
  • Potentially higher interest rates due to the lump sum investment.

Cons:

  • Less flexibility as additional contributions are not allowed.
  • Early withdrawal penalties may apply.
  • Interest rates may be lower compared to other investment options.

SPDA Annuity Rates

Current SPDA rates typically range from:

  • 1-year term: 1% to 3%
  • 5-year term: 2% to 4%
  • 10-year term: 3% to 5%

An annuity broker, like The Annuity Expert, can provide the most up-to-date rates as they can fluctuate based on market conditions and the financial health of the insurer.

Deferred Variable Annuities

The Benefits Of Deferred Annuities

Tax-Deferred Growth

Deferred annuities allow your investments to grow tax-deferred. This means you won’t pay taxes on your earnings until you withdraw them, accelerating your savings growth. This tax advantage makes your investment more effective over time, significantly boosting your retirement funds.

Steady Income In Retirement

One of the key benefits of deferred annuities is the ability to convert them into a steady income stream during retirement. This ensures a consistent flow of income, helping you manage your finances predictably and securely. With this reliable source of income, you can enjoy your retirement without financial worries.

Additional Financial Protections

Deferred annuities often come with death benefits, protecting your beneficiaries by ensuring they receive a portion of your investment if you pass away. You can also choose to annuitize your annuity, transforming it into a lifetime income stream. This guarantees you won’t outlive your savings, providing peace of mind and financial stability.

Understanding Early Surrender Implications

While deferred annuities offer many benefits, surrendering them early can result in financial penalties and tax consequences. Surrender charges decrease over time and may disappear after a certain period. Withdrawing funds before age 59½ may lead to tax penalties, impacting your overall returns. To avoid these penalties, consider taking penalty-free withdrawals within your annuity’s contractual limits.

Assessing Deferred Annuity Rider Fees

Riders are optional features that enhance your annuity with additional benefits, such as long-term care coverage or guaranteed income. However, these riders come with additional costs. It’s crucial to evaluate whether the benefits of these riders justify their costs. Some riders may provide significant peace of mind and financial security, but you need to assess their value based on your specific needs and financial situation.

Single-Premium Deferred Annuities And Flexible Premium Deferred Annuities

How Are Deferred Annuities Taxed?

  • Qualified Deferred Annuities: Contributions are made with pre-tax dollars, so taxes are deferred until you withdraw funds. Withdrawals are taxed as ordinary income.
  • Non-Qualified Deferred Annuities: Contributions are made with after-tax dollars. Only the earnings are taxed upon withdrawal, not the principal.
  • Roth Deferred Annuities: Contributions are made with after-tax dollars. Withdrawals are generally tax-free, provided you meet certain conditions (e.g., holding the account for at least five years and being over age 59½).

How We Can Help

At The Annuity Expert, we understand the challenges of planning for a secure retirement. With 15 years of experience as an insurance agency, annuity broker, and retirement planner, we are committed to finding the best solutions at the lowest costs for our clients.

  • Our Core Belief: We believe in delivering the best value, ensuring you have the knowledge and tools necessary to make informed financial choices. Deferred annuities can be confusing, but our expertise helps you make informed decisions with personalized advice tailored to your needs.
  • Your Goal: Achieve financial security through deferred annuities. We understand the emotional impact of financial insecurity and aim to alleviate this stress by providing reliable, professional guidance.
  • The Problem: Financial insecurity during retirement is a significant concern. Early surrender penalties and complex rider fees can be daunting. We recognize these issues and provide solutions that minimize financial impact and maximize benefits.
 What Is A Deferred Annuity?

What We Recommend

Step 1: Schedule A Free Consultation

  • Action: Schedule a free consultation with one of our experienced advisors.
  • What Happens: Discuss your financial goals, current investments, and retirement plans.
  • Benefit: Gain a clear understanding of how deferred annuities can fit into your overall strategy.

Step 2: Personalized Plan Development

  • Action: Develop a personalized plan outlining the best deferred annuity options for you.
  • What Happens: Explain the details of each option, including potential benefits and costs.
  • Benefit: Have a customized strategy aligned with your financial goals.

Step 3: Implementation And Ongoing Support

  • Action: Assist in completing the necessary paperwork and implementing your plan.
  • What Happens: Provide ongoing support to ensure your investments continue to meet your needs.
  • Benefit: Enjoy peace of mind, knowing your retirement plan is on track and expert help is always available.

Features And Benefits

  • Free Consultation: Access expert advice at no initial cost.
    • Meaning for You: You can explore your options without financial commitment.
  • Personalized Plans: Receive strategies tailored to your financial goals.
    • Meaning for You: Ensures your retirement plan is uniquely suited to your needs.
  • Ongoing Support: Benefit from continuous guidance to keep your investments optimized.
    • Meaning for You: Keeps your financial strategy effective and adaptable.

Addressing Common Objections

  • Cost Concerns: We offer competitive rates and prioritize finding cost-effective solutions.
  • Complexity: Our advisors simplify the process, making it easy to understand and make informed decisions.

Failing to plan for your retirement can lead to financial insecurity and stress, risking your future stability. Working with The Annuity Expert ensures a secure, well-planned retirement. You’ll experience peace of mind, knowing your financial future is in capable hands.

Contact us today for free advice or a free quote. Let’s secure your financial future together.

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Questions From Our Readers

How are deferred annuities calculated?

The formula for calculating a deferred annuity is future value = present value × (1 + interest rate) number of periods. For example, if you have $10,000 in a deferred annuity that pays 5% interest and you plan to leave it invested for ten years, the future value of the annuity would be: $10,000 × (1 + 0.05)^10 = $16,105.05

Can you lose money with a deferred annuity?

You can lose money in a deferred annuity through early withdrawal penalties, investment losses in variable annuities, or fees and charges the issuing company applies. That’s why it’s important to research an insurer before buying an annuity. You can check an insurer’s financial strength rating at A.M. Best and Moody’s websites.

When should I buy a deferred annuity?

The best time to buy a deferred annuity is when you have the money you won’t need for at least seven years. This will give the annuity time to grow and compound without the risk of having to withdraw the money early. Also, remember that you may want to start taking Social Security benefits at age 62. It could reduce your Social Security benefits if you start receiving payments from a deferred annuity before that. So, you may consider waiting until age 62 to start taking payments from a deferred annuity.

How soon can benefit payments begin with a deferred annuity?

With a deferred annuity, you can choose when you want payments to begin. The most common choice is at retirement, but you can also choose to start receiving payments before or after retirement in as little as 30 days. If you start taking payments before age 59½, you may have to pay a 10% early withdrawal penalty.

What are the basic types of deferred annuities?

There are two basic types of deferred annuities: fixed and variable. With a fixed deferred annuity, the interest rate is guaranteed for a set period, usually 2 to 10 years. After that, the interest rate may change but never be lower than the guaranteed minimum rate. With a variable deferred annuity, the interest rate and your payments can go up or down depending on how the investments in the annuity perform.

How many phases does a deferred annuity have?

A deferred annuity has two phases: the accumulation and payout phases. You contribute to the annuity during accumulation, and the money grows tax-deferred. During the payout phase, you begin taking distributions from the annuity and pay taxes on the money as you withdraw it.

How do interest earnings accumulate in a deferred annuity?

Interest earnings in a deferred annuity accumulate tax-deferred, compounding over time until withdrawals are made in the future.

How soon can the benefit payments begin with a deferred annuity?

Depending on the contract terms, benefit payments can begin 30 days after purchasing a deferred annuity.

Who can surrender a deferred annuity contract?

Only the owner of a deferred annuity contract, not the annuitant or beneficiaries, can surrender it.

When do surrender charges apply to deferred annuity contract surrenders?

Surrender charges apply when withdrawing funds from a deferred annuity contract before the end of the surrender period, typically within 5 to 10 years from purchase.

What is the guaranteed minimum interest rate in a fixed deferred annuity?

The guaranteed minimum interest rate in a fixed deferred annuity is the lowest rate at which money will accrue interest, set by the insurance company at contract initiation.

Why do I have to wait ten years to benefit from my annuity?

This could be a specific term of a deferred annuity chosen for tax or growth reasons.

When do deferred annuity payments begin?

Deferred annuity payments typically begin at a future date chosen by the annuitant, often at retirement.

What is the primary benefit of a deferred annuity?

The primary benefit of a deferred annuity is tax-deferred growth of investments.

What is the deferred annuity formula?

The deferred annuity formula involves calculating the future value of an annuity based on regular contributions, interest rate, and time.

What does SPDA mean?

SPDA stands for Single Premium Deferred Annuity.

What is a Single Premium Deferred Annuity?

A Single Premium Deferred Annuity involves a one-time payment with benefits starting at a future date.

What is a tax-deferred annuity?

A tax-deferred annuity allows investment earnings to grow tax-deferred until withdrawals are made.

What is a Flexible Premium Deferred Annuity?

A Flexible Premium Deferred Annuity allows for multiple payments over time, with benefits starting in the future.

What is a Fixed Deferred Annuity?

A Fixed Deferred Annuity guarantees a fixed return, with payments starting at a future date.

What is a Deferred Variable Annuity?

A Deferred Variable Annuity involves investment in various assets with payments starting later.

What is a deferred annuity used for?

A deferred annuity is used for long-term financial planning, often for retirement savings.

What is a Deferred Annuity Pension?

A Deferred Annuity Pension is a retirement plan offering delayed payments.

How many types of deferred annuities are there?

There are several types of deferred annuities, including fixed, variable, and indexed.

How does a flexible premium deferred annuity work?

A flexible premium deferred annuity works by allowing varied contributions and deferring income.

Are tax-deferred annuities a good investment?

Depending on individual financial goals, tax-deferred annuities can be a good investment for long-term growth.

Are deferred fixed annuities a good investment?

Deferred fixed annuities can be a good investment for those seeking stable, guaranteed returns.

The type of annuity that can be purchased with one monetary deposit is called?

The type of annuity that can be purchased with one monetary deposit is called a single premium annuity. This annuity requires a lump sum payment upfront, providing a guaranteed income stream for the future.

How soon can the benefit payments begin with a deferred annuity?

With a deferred annuity, the start of benefit payments depends on the specific terms of the contract. Generally, the policyholder can choose when to begin receiving payments, such as at retirement age. However, it’s important to review the annuity agreement to understand any specific requirements or restrictions regarding when benefit payments can begin.

What are the different plans for Deferred Income Annuity?

Deferred Income Annuities (DIAs) come in different types, such as Variable Annuities and Fixed-Indexed Annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB). The key difference between these and traditional DIAs is in how income is generated and managed. With a GLWB, the owner retains control over the annuity’s principal and can withdraw a certain amount annually while still benefiting from a guaranteed income for life. On the other hand, traditional DIAs involve annuitization, where you convert your annuity into a stream of income, typically relinquishing control over the principal in exchange for the guarantee of a steady income.

What does a “5-year surrender” mean in a deferred annuity?

In a deferred annuity, a 5-year surrender period is a time frame, typically the first five years after purchasing the annuity, during which you’ll face a penalty if you withdraw more than a certain percentage of your funds. This penalty decreases each year until it disappears after the fifth year. After this period, you can access your money without facing surrender charges. This period helps the insurance company manage their risk and investment strategies.

When must you withdraw all your money from a single premium deferred annuity?

When must you withdraw all your money from a single premium deferred annuity? Generally, for a single premium deferred annuity, you are not required to withdraw all your money at any specific time during your lifetime. These annuities typically allow you to defer withdrawals indefinitely, with the understanding that at some point, usually by age 85 or 90, the contract may require annuitization or the start of distributions.

I have a nonqualified deferred annuity. Can I transfer to a bank into an IRA?

You can, but you don’t want to because the money you contributed to the annuity has already been taxed and will be taxed again. You will also be limited on future contribution limits.

How do I transfer my deferred annuity to my kids?

To transfer a deferred annuity to your children, you need to fill out a beneficiary designation form provided by the annuity company. On this form, you can name your children as beneficiaries.

Is a flexible premium deferred annuity a good long-term investment alternative to a low-yield bond fund in a taxable account?

Choosing between a flexible premium deferred annuity and a low-yield bond fund depends on your risk tolerance, liquidity needs, and tax situation. Annuities offer tax advantages and principal protection but have higher fees and limited liquidity.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

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

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