Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. A split annuity
isn't really one
annuity, but a
combination of
two or more
annuities funded
with a single
sum of money. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Annuity guarantees,
including, but not
limited to, immediate
annuity guarantees
and fixed-interest
deferred annuity
guarantees, are contingent
on the financial strength and claims-paying
ability of the annuity
issuer.
Withdrawals from an
annuity prior to age
59½ may be subject
to a 10% federal
income tax penalty. | | The Split Annuity: Current Income Plus Future Savings
Financial planning in
retirement usually has two
primary goals: create a
steady, dependable stream
of income and preserve
retirement savings. One
idea that may assist in
achieving these retirement
objectives is the split
annuity concept.
What is a split annuity?
An annuity is a contract purchased from an insurance company
that can be used to accumulate money on a tax-deferred
basis for retirement and/or to convert retirement assets into a
stream of income. A split annuity isn't really one annuity, but a
combination of two or more annuities funded with a single sum
of money. A portion of the money is placed in an immediate
annuity that makes a fixed payment to you for a fixed period of
time, such as ten years. The balance of the money is invested
in a fixed-interest deferred annuity, which accrues sufficient
interest to equal the beginning sum used to fund both annuities
by the time the immediate annuity payments stop. The
amount of income you receive depends on the amount of
money paid into each annuity, and the terms and interest rates
applicable to each contract. Example of Split Annuity $100,000 investment |
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Immediate Annuity | Deferred Annuity |
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$41,457 generates annual payments of $5,136.76 for 10 years | $58,543 at 5.50% per year will grow to $100,000 by the end of 10 years | This example assumes a total initial investment of $100,000.
This is a hypothetical illustration and does not reflect actual
annuity products or performance. Withdrawals from an annuity
prior to age 59½ may result in a 10% penalty tax imposed by
the IRS. Any guarantees are subject to the financial strength and the claims-paying ability of
the issuer. |
Split annuity benefits
Fixed income.The immediate annuity makes fixed payments
to you for a fixed period of time, regardless of changing interest
rates or stock market fluctuations. Possible tax-advantaged payments.The tax code treats payments
received as an annuity as being divided into two parts:
a nontaxable portion that represents the return of premiums
paid into the annuity, and a taxable portion that corresponds to
the earnings in the annuity. As a
result, only a portion (i.e., the
earnings) of each payment is
included in your gross income.
The remainder is a return of
principal and not taxed. Tax-deferred accumulations.The
earnings on a fixed-interest
deferred annuity (i.e., the interest
earned on your money) are tax
deferred until withdrawn. Unlike
most taxable investments, you
pay no taxes on your annuity
earnings until you begin to take
payments or receive income.
Income tax deferral allows your
money to potentially grow faster
than in a taxable account, because earnings that otherwise
would be subject to taxes are available for growth. Flexibility.The fixed-interest deferred annuity can provide a
new income stream at its maturity. Also, most fixed-interest
deferred annuities allow you to withdraw a portion of the annuity's
cash value without penalty. This option provides you with
access to additional money should you need it in addition to
the immediate annuity payments. Return of principal.At the end of the immediate annuity payout
period, the fixed-interest deferred annuity is worth the original
amount of your investment in both annuities. At that time, you
can use the money from the fixed-interest deferred annuity
however you wish, including another split annuity. Split annuity limitations
Surrender or early withdrawal charges.The fixed-interest deferred
annuity usually has early withdrawal or surrender
charges. This assessment is often a percentage of a withdrawal exceeding any applicable
penalty-free amount allowed in the
annuity contract. Most fixed-interest
deferred annuities include some
exceptions to the withdrawal charge,
including withdrawals due to
disability, loss of employment,
long-term care, and death of the
annuity owner. Fixed annuity payments.While
knowing that you will receive a fixed
payment for a fixed period of time
may be comforting, it may also prove inconvenient if you need
or want more income. Typically, immediate annuity payments
are fixed once they've begun, although there are some exceptions
(such as inflation adjustments and commuted payment
options) that allow for withdrawals from the balance of the
immediate annuity in addition to the fixed payments. Lower deferred annuity interest rates.The appeal of the split
annuity idea is knowing that at the end of the immediate
annuity payout period, the fixed-interest deferred annuity will
have earned enough interest to equal the principal amount
used to fund both annuities. The growth of the fixed-interest
deferred annuity portion of the split annuity is based on the
interest rate paid by the annuity issuer. The immediate annuity
payments are based, in part, on the amount apportioned to the
immediate annuity. The more money allocated to the immediate
annuity, the larger the income payments. If more money is
allocated to the fixed-interest deferred annuity because of
lower interest rates, then less money is allocated to the immediate
annuity, decreasing the payments to you. Split annuity uses
While the split annuity concept is not the only alternative for
pursuing a particular financial objective, it may be useful in a
number of situations. Dependable income and savings.Many people, especially
retirees, want a dependable income coupled with preservation
of retirement funds. The split annuity concept may offer a
means to both objectives. Not only does the immediate annuity
pay a fixed income for a fixed period of time, but a portion of
each payment received from the immediate annuity may not be subject to income tax because it is considered a return of
premium. Immediate annuity payments are fixed and don't
fluctuate during the payout period, regardless of changing interest
rates. Moreover, the deferred annuity part of the concept
offers a fixed interest rate on that portion of the money allocated
to it. Most deferred annuities also allow for a portion of
the account value to be withdrawn without penalty, so if you
need more money in addition to the immediate annuity payments,
you can withdraw it from the deferred annuity. For retirement plan income.Say your only retirement income
is Social Security. You have savings but you're concerned that
if you take out too much, you may run out too soon. The split
annuity can help provide a steady source of
income without exhausting your principal.
It's also flexible enough that if you
need more income, you can take some
from the fixed-interest deferred annuity
(subject to early withdrawal penalties).
At the end of the fixed income period,
you can reevaluate your finances and
determine whether you need more,
less, or the same income, and adjust
accordingly. Bridge the gap between retirement and Social Security.You
have some savings in the bank and you want to retire, but you
don't want to (or are too young to) apply for Social Security
retirement benefits. The income payments from the immediate
annuity part of the split annuity concept may provide the income
you want between retirement and Social Security. The
fixed-interest deferred annuity preserves your principal by
earning interest on the money you apportion to it. When you're
ready to begin receiving Social Security retirement benefits,
the fixed interest deferred annuity will have earned enough
interest to equal your original principal investment. The split annuity can help
With company pensions vanishing and the cost of living rising,
you likely will have to rely on your own savings to provide the
majority of your retirement income. The split annuity concept
can be a useful part of your retirement income plan by
supplying fixed income while preserving funds for later use. |