Should I cash out my annuity to pay off debt?
If you don't have a strong handle on your spending and expenses—and please be honest here—then the last thing you want to do is use your annuity to dig yourself out of debt. That kind of quick fix, in the absence of some serious behavioral shifts, will only lead you right back into the habit of acquiring debt.
Spending annuity savings to pay student loan debt decreases the amount of money you have preserved for retirement. This means you will need to manage your future well-being by turning to other financial tools and income sources.
When should you start taking money out of your annuity? To avoid an early withdrawal penalty tax from the IRS, wait until you turn 59 ½. After you turn 73, the IRS requires you to take a required minimum distribution each year. These vary based on the value of your annuity.
Annuity early withdrawal penalties
Annuity withdrawals made before you reach age 59½ are typically subject to a 10% early withdrawal penalty tax.
An annuity helps you accumulate money for future income needs. An annuity is not a savings account or savings certificate, and it should not be bought for short-term purposes. The most appropriate use for income payments from an annuity contract is to fund your retirement.
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed.
You might choose (or need) to withdraw from your annuity before retirement for several reasons. The most common reason is a need for immediate access to cash during financial hardship, such as a job loss, medical emergency or unexpected expense.
Cashing out an annuity has pros — access to immediate cash and potential tax advantages — but also cons including surrender charges, taxes, penalties and loss of future income stream.
Withdrawals from annuities can trigger one of two types of penalties. The insurer issuing the annuity charges surrenders fees if funds are withdrawn during the annuity's accumulation phase. The IRS charges a 10% early withdrawal penalty if the annuity-holder is under the age of 59½.
Because annuities grow tax-deferred, you do not owe income taxes until you withdraw money or begin receiving payments. Upon withdrawal, the money will be taxed as income if you purchased the annuity with pre-tax funds. You'll only owe taxes on the annuity's gains if it was purchased with post-tax dollars.
What is the 5 year rule for annuities?
The five-year rule lets you spread out payments from an inherited annuity over five years, paying taxes on distributions as you go. You take the remainder of the contract and stretch annuity payments out over the rest of your life. Your life expectancy sets the basis for your actual payment amount and schedule.
To avoid paying taxes on your annuity, you may want to consider a Roth 401(k) or a Roth IRA as a funding source. Then, you do not pay taxes upon withdrawal since Roth accounts are funded with after-tax dollars.
If the insurer can expect to receive a 7 percent return on its $50,000, the monthly payout would rise to $449.96. At a 3 percent return, the payout would drop to $327.05. Insurers base their anticipated return on the performance of their often-conservative investment portfolios.
For instance, a $100,000 annuity purchased at age 65 with immediate payments might yield about $614 monthly. If the annuity has a 5% interest rate over 10 years, the monthly payment could be approximately $1,055.. At age 70, the same annuity might pay around $613 monthly for life.
Annuities are safe investments, provided you work with a reputable insurance company. As long as you're confident in the financial soundness of the insurance company selling you the investment, you are guaranteed to get at least your principal back, depending on the type of annuity you purchase.
Here's how much income a $300,000 fixed annuity might pay per month: $3,517 if you choose single life only, which allows you to receive income for life but does not offer a death benefit to your beneficiaries.
In her 2001 book, “The Road to Wealth,” Suze Orman tells readers that “if you don't want to take risk but still want to play the stock market, a good index annuity might be right for you.”
Not only do fixed annuities not lose money during a market crash, they also come with the ability to generate guaranteed income payments over your lifetime.
A Fixed Annuity can provide a very secure, tax-deferred investment. It can provide a guaranteed minimum interest rate, with no taxes due on any earnings until they are withdrawn from the account.
The bottom line: If you're convinced that the security of an annuity will work for you, and are assured by the fact that your essential expenses can be covered for the rest of your life, it can make financial sense not to wait, but to purchase the annuity when you need income.
Is it better to take cash value or annuity?
The lump sum provides a significant amount of immediate cash. Many opt for this option to avoid long-term tax implications. Annuity payments offer tax benefits and can prevent overspending lottery winnings. They provide guaranteed income, and can lead to more money in the long run.
If you're really concerned about losing your pension because of the pension provider's financial situation or inability to pay out, taking the lump sum may end up being the more secure option. If your annuity does not have a cost-of-living adjustment, its purchasing power will decrease over time due to inflation.
You can, however, lose money on annuities if the insurance company that issued the annuity goes out of business and defaults on its obligation. There is a degree of regulatory protection for investors in case this happens.
If the total value of your paid-up benefit in the fund is less than R15 000, you can withdraw your benefit as a lump sum before you turn 55.
It depends on the payout option you choose. You can outlive period-certain annuity payouts — an option that pays for a specific period of time and then stops. You can't outlive life annuity payouts — these are designed specifically to provide an income for the rest of your life.
