If you’re seeking a guaranteed income stream that begins in the future and continues for your lifetime, your spouse’s lifetime, or a specific period, a Deferred Income Annuity (DIA) might be worth considering.
Distinct Advantages of DIAs
DIAs offer distinct advantages over other safe money products. With a DIA, you won’t need to constantly monitor the stock market, track interest rates, or calculate dividends. If your goal is a lifetime guaranteed income you can’t outlive, a DIA can achieve that. This can provide peace of mind knowing you’ll have a predictable income source when you retire.
Tax Benefits of Deferred Income Annuities
One significant benefit of DIAs is their potential tax advantages. For some, DIAs are an excellent choice for retirement portfolios because they allow for tax deferral until a later date, potentially when you’re in a lower tax bracket. Unlike some other annuities that require upfront tax payments, DIAs can offer more tax efficiency.
Security and Stability of DIAs
DIAs are backed by the issuing insurance company’s assets and are not subject to stock market fluctuations. Additionally, because they generally don’t have account management fees, your entire premium payment goes toward your future monthly income.
Payment Options
When you purchase a DIA, you choose the frequency of your payments, typically monthly, annually, or quarterly.
Customization for Specific Needs
Although DIAs are relatively straightforward, they can be customized to meet your specific needs. Recent product enhancements provide more options to tailor your DIA to your unique retirement goals.
Addressing Concerns About Beneficiaries
A common question about annuities is what happens to the funds upon the annuitant’s death. Will payments cease? Will loved ones lose the invested money? Customization options address this concern by allowing payments to continue to designated beneficiaries, ensuring continued income. Other customization options include guaranteed periods of coverage and adding a second person to the annuity. An annuity specialist can help tailor a plan to your individual circumstances.
Tax Implications: Qualified Deferred Income Annuities
The taxation of your annuity proceeds depends on how you fund the DIA. For example, you might use funds from selling stocks, bonds, a business, or a home. You could also use cash from a maturing CD or existing deferred annuity accounts. However, if you fund your DIA with lump-sum distributions from defined benefit or contribution plans, SEPs, IRAs, 1035 exchanges, or Section 403b plans, it becomes a “Qualified Deferred Income Annuity.” This also applies if you use funds from a 401(k) or traditional IRA. Remember to consult a tax advisor, as these funds have grown tax-deferred, and your payments will be considered taxable income.
Tax Implications: Non-Qualified Deferred Income Annuities
Non-qualified Deferred Income Annuities are funded with money that has already been taxed. Examples include proceeds from selling a house, mutual funds, a business, or other investments. They might also be suitable if you receive a large inheritance or insurance settlement.
When you receive payouts from a non-qualified annuity, a portion of each payment is considered a return of principal and is excluded from taxation. This is calculated using an “exclusion ratio.” You can typically find these details on any quotes you receive. Ensure your annuity professional explains this thoroughly before making a decision.
Conclusion
Deferred Income Annuities offer a potential solution for those seeking a pension-like, reliable income source. Like a variable annuity, your funds grow over time until you begin receiving payments. Like an immediate annuity, DIAs provide fixed payouts for life. Customization options allow you to address specific needs, such as providing income for a spouse or beneficiary.
