Split-Annuities: How to Get the Most Out of Your Retirement Money

Shawn Plummer

CEO, The Annuity Expert

Hello there, fellow financial enthusiasts! Today, we’re diving into the world of ‘split annuities.’ Before you start conjuring images of a fractured money nest, let me assure you that split annuities are far from something broken. Instead, they represent a balanced financial strategy to maximize your retirement income.

Unraveling Split Annuities

A split annuity isn’t a distinct type; instead, it’s a financial strategy that leverages the strengths of two types of annuities – an immediate annuity and a deferred annuity. This approach is often called a ‘mixture annuity’ or a ‘combination annuity’ due to the blended nature of its design.

In a split annuity program, your investment is divided between an immediate annuity that starts paying you immediately and a deferred annuity that grows tax-deferred over time. This dual approach provides immediate income while simultaneously rebuilding the original investment amount.

The Split in a Split Annuity Program

Split annuities are contracts that are “split” into the two components of a split annuity program.

  • Immediate Annuity: This portion of your investment provides income immediately after purchase. The goal is to guarantee a regular income for a set number of years, usually matching the duration of the deferred annuity.
  • Deferred Annuity: The remaining funds are invested in a deferred annuity. This annuity grows tax-deferred over the same period as the immediate annuity payments. At the end of the term, it should have grown back to the original investment amount, hence providing a ‘bonus annuity.
Split Annuities

The Early Withdrawal Puzzle

One of the most common questions about annuities is whether they are subject to an early withdrawal penalty. The answer is it largely depends on the contract terms and the type of annuity.

Typically, annuities have a surrender period, during which withdrawals exceeding a certain percentage of the account value are subject to a surrender charge. Depending on the contract, this can range from a few years to over a decade.

IRS Penalties: Not All Annuities are Created Equal

Are all annuities subject to early withdrawal penalty?

It’s crucial to note that certain annuities are subject to an IRS penalty for early withdrawals. For example, if you withdraw money from an annuity before you’re 59½ years old, you might have to pay a 10% penalty on the amount withdrawn, in addition to regular income tax. This rule typically applies to qualified annuities, such as those funded with pre-tax dollars or within a traditional IRA.

However, non-qualified annuities, funded with after-tax dollars, aren’t subject to the 10% early withdrawal penalty, although they may still face surrender charges if withdrawn early.

The Double Annuity Advantage

A significant benefit of the split-annuity strategy is that it acts like a ‘double annuity.’ You receive income now through the immediate annuity while your deferred annuity rebuilds the initial principal. This strategy can offer a sense of financial security and predictability, especially for those nearing or in retirement.

Navigating the Split Annuity Route

While the split-annuity strategy can seem ideal for some, it’s essential to understand its implications fully.

  • Understanding Your Needs: A split-annuity strategy can be ideal if you’re looking for a steady stream of income immediately while simultaneously securing your original investment for the future. However, it may not suit those who anticipate needing a significant lump sum in the immediate future.
  • Assessing the Market: Market conditions can significantly influence the success of a split-annuity strategy. Interest rates, in particular, play a substantial role in determining the growth of your deferred annuity.
  • Aligning with Retirement Goals: The split-annuity strategy should seamlessly blend into your broader retirement plan. It’s not a stand-alone solution but a part of your holistic retirement blueprint.
Split Annuity

Dealing with the Unexpected: Early Withdrawals

Life is unpredictable, and sometimes early withdrawals become necessary. Therefore, it’s essential to understand how these situations are handled in the context of split annuities.

Immediate Annuity Withdrawals: Early withdrawals from immediate annuities can incur penalties. However, situations like severe illness may allow exceptions based on the contract terms.

Deferred Annuity Withdrawals: While the deferred portion of a split annuity aims at long-term growth, early withdrawals may be possible. However, these could incur surrender charges and an additional IRS penalty depending on the annuity’s qualification status.

Next Steps

Split annuities, or the ‘double annuity’ strategy, offer an intriguing approach to balancing immediate income needs with long-term investment growth. This combination or mixture of annuities splits your funds between an immediate and a deferred annuity, offering immediate returns and future security.

However, like any financial strategy, it comes with considerations. Understanding your financial needs, assessing market conditions, and aligning the strategy with your retirement goals is essential. And let’s not forget the potential implications of early withdrawals, which could lead to surrender charges and IRS penalties.

Ultimately, navigating the world of split annuities requires careful thought, thorough understanding, and a keen eye on your financial horizon. As always, seeking the advice of a financial advisor can be invaluable in making these critical decisions.

Split-Annuity Strategy

Split Annuity Quotes

Get help or a quote from a licensed financial professional. This service is free of charge.

Contact Us

Frequently Asked Questions

What is a split annuity?

To implement a split-annuity strategy, you would buy two types of annuity contracts: immediate and deferred. The immediate annuity would give you an income stream in the early years of your retirement, while the deferred annuity would offer a potential income stream in the future.

What is the 50% rule for annuity?

In retirement plans, the payment made to the surviving spouse must be at least 50% but not more than 100% of the annuity paid during the participant’s lifetime.

What is an annuity, and why is it wrong?

Annuities are contracts that span a long time, with charges for ending them early. For income annuities, you give up control over your investment. Certain kinds of annuities may offer minimal or no interest. Guaranteed income from some annuities might not be sufficient to keep up with inflation.

Are multi-year guaranteed annuities a good investment?

Multi-year guaranteed annuities can be used as an alternative to CDs or invested alongside them. In addition, they provide a possibly safer investment option for the future and offer favorable tax treatment when the money is withdrawn.

What is the 4 percent rule for annuity?

Bingen’s Rule suggests that if a retiree has a portfolio divided equally between stocks and bonds, they can avoid running out of funds by withdrawing 4 percent of the account balance in the first year of retirement and adjusting that amount for inflation each year.

Do annuities survive death?

If the annuity contract has no death-benefit provision, the annuity payments will stop upon the annuity owner’s death. However, if there is a death-benefit provision, the annuity owner can choose a beneficiary who will receive either the remaining balance or a minimum guaranteed amount, whichever is greater.

What is the five-year rule for annuity payout?

The Five-Year Rule requires that if a non-spousal beneficiary inherits a non-qualified annuity, they must withdraw the entire balance within five years of the owner’s death. However, the Rule permits the beneficiary to choose when to receive the death benefit proceeds.

Related Reading

  • The different types of annuities available on the market.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed insurance agent and annuity broker with over a decade of in-depth experience. Since beginning his journey in 2009, he has not only been pivotal in selling and educating about annuities and insurance products but 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. 

Scroll to Top