When you envision the years you intend to spend in retirement, how do you see yourself receiving income? Will you continue to work to create income or will you cash in your stock investments to pay your bills? Many people do not realize there are also other options, including leveraging annuities to receive consistent payouts.
Once you determine what your long term goals are, you can better decide which type of annuity is right for you. To do this, you first need to understand how annuities work, how they pay out and what the differences are between the various types. Here’s an introduction to get you started.
What Is an Annuity?
An annuity is a type of financial product into which you put money, either all at once (in a lump sum) or over time. One of the main differences between an annuity and other types of investment or savings products is that annuities are managed by life insurance companies, not banks or financial institutions.
Once you have put money into a fixed annuity, two things can happen: the money can grow, or you can receive payments regularly for a duration that you choose when you open the annuity. How these two things work together will depend on the kind of annuity that you select.
In MYGAs (multi-year guaranteed annuities), because they are intended to help you grow your balance, the money you put in stays there for the length of term you select which is known as the accumulation period. At the end of that term, you have the options to cash out, begin a new contract or move the money to a new annuity.
How Do Annuity Payouts Work?
As mentioned previously, payouts work according to the type of annuity that you select.
- MYGA – In the case of multi-year guaranteed annuities, you will place your money into the annuity and then simply let it grow for a term that you select (usually between 2 and 8 years). Once this period is up, you can choose to receive all of the money, accept a new accumulation term, or roll it into another annuity which can be another MYGA for continued growth or a fixed annuity.
- Fixed annuity – If you want to lock in a certain rate, you can invest your money into a fixed annuity. In doing this, you will know exactly how much your money will grow and how much your payments will be each time. Payouts from fixed annuities are always the same and happen on the same schedule for the entire life of the annuity, which could be your entire life depending on the terms you choose.
- Variable annuity – The rate on a variable annuity can change, but the payout process still remains the same. You will receive payouts on a regular schedule, but they may change over time according to what the rate has changed to. Payouts last for the entire term of the annuity, which can be as short as a few years or as long as the rest of your life.
Do You Pay Taxes on Payouts?
Some types of annuities are more favorable for taxes than others which is why many people select a MYGA as a part of their retirement planning. MYGAs are tax advantaged in multiple ways, including that you do not pay taxes on any of the growth in the account until you receive the money.
This allows your wealth to grow faster and reduces the inconvenience for you. Additionally, if you fund a MYGA with after-tax dollars, you will not pay taxes on any of the money that you receive from a fixed annuity later other than on the gains that are distributed.
This makes MYGA conversion one of the most appealing ways to grow your income without increasing your tax burden. If you funded your MYGA with pre-tax dollars and then converted the MYGA to a fixed annuity to start receiving payments, you will need to pay taxes on all of the money, since you haven’t paid your income taxes yet.
However, this can still be advantageous, because it allows you to start with a higher balance that has more power to grow.
Choose the Annuity That Fits Your Goals
Annuity payouts are a source of stability for many retirees. They can provide the reassurance that you will receive your regular payments on time and for the amount that you expect according to the terms. However, whether you want a variable annuity or want to leverage a MYGA to grow your wealth before you start receiving payments is a decision that only you can make.
That’s why Pillar Life Insurance offers a self-service online portal where you can choose the products that are right for you without the need to contact to an agent. Discover the annuity choices that we offer by taking our short online questionnaire.