What is an Annuity?
An annuity is a periodic investment contribution fund that is paid in installments
later in life. Unlike 401k or other retirement investment vehicles, the amount
received does not always depend on stock prices or other corporate value
indicators. Annuity investors sometimes seek to cash out their funds, opting
for a lump sum payment that is smaller than the total periodic disbursement.
Types of Annuities
There are two main types of annuities: Deferred or immediate.
A deferred annuity pays later in life, often starting at retirement, and
provides deferred tax payments on the invested and interest earnings until
pay-out.
An immediate annuity starts paying an allotment soon after making the first
contribution. The investment contribution may have tax deferred status, but the
payment amount is considered taxable income.
Depending on the annuity contract wording, an investor may be able to convert a
deferred annuity into an immediate annuity which differs from seeking an
annuity pay-off.
Within the two main types of annuities, investors can choose between fixed or
variable rate plans. Fixed plans allot a predetermined payment amount, whereas
a variable rate may see the allotment amount change according to the market
value of stocks and bonds. In weak markets, fixed rate plans give reliable
security while strong markets favor variable rate plans.
Regardless of which type of annuity an investor chooses, the biggest advantages
to annuities are the tax-deferred status of contributions and the projected
reliability of later pay-outs.
Continuity
Most annuities issued by insurance companies discontinue annuity payments upon
the death of the investor. Some, however, allow either a remaining funds amount
or full allotment amounts to be paid to the beneficiary over the life of the
investment fund.
If an investor ends the contributions and cashes out the annuity fund early, he
or she may incur not only taxable income requirements but also fund penalties,
and each should be considered fully before continuing with the cash-out option.
What kind of penalties the annuity fund may incur differs from plan to plan;
understand the penalties before purchasing this investment option.
Consult a tax advisor regarding tax laws and purchase an annuity from a
representative whose income is not dependent on selling annuities.
Annuity Cash-Outs
Cashing out an annuity involves receiving the invested funds and vested
interest prior to the maturity date of the annuity. Generally, there are two
accepted methods of cashing out an annuity: To the investor or to an agent
company.
When the investor directly receives the annuity funds, the annuity fund is
closed. The investor often incurs significant funds reduction due to prepayment
penalties, and the received funds are subjected to tax proration.
The investor also has the choice of assigning or selling the annuity to an
agent. The investor accepts a bulk payment for transferring the annuity to
another entity. The total pay-out is less than the projected payment total over
the life of the annuity, but it relieves the investor of future contribution
requirements and allows ready cash. However, that pay-out may be considered
taxable income unless invested or transferred into another tax-deferred
investment vehicle.
There generally are no premature payment penalties in assigning the annuity,
because the annuity plan still exists; the responsible party for contributions
and disbursements have changed.
How much an investor can receive depends on the annuity funds balance, how long
before funds maturity, the amount of the contribution, and the agent’s terms
and conditions.
Summary
For the investor who wants not only a return on the investment but also
reliability of income later in life, annuities can become a sensible addition
to any portfolio. When needed, cashing out an annuity can have greater tax
benefits than dissolving other investment vehicles. Getting the most from a
lump sum pay-out is a key factor, and shopping for the best deal possible is a
wise choice for any annuity funds holder.