A single-premium deferred annuity (SPDA) is a type of delayed annuity with a single payment that only grows in value during the accumulation phase. This increase is tax-deferred until annuitization, at which point regular payments will start. Single-premium deferred annuities can be fixed or variable, and distributions are taxed only when they are received. There is no restriction on how much money an individual can invest in an SPDA.
Understanding Deferred Annuities With A Single Premium
Single-premium deferred annuities (SPDA) are different from immediate contracts in that they grow tax-deferred for a period of time before being paid out. They are also distinct from flexible premium delayed annuity contracts, which require the investor to make repeated payments into the contract after the first premium throughout the accumulation phase. The annuity’s assets develop over time.
A single premium deferred annuity (SPDA) is created with a single payment – a substantial sum of money. Depending on the annuity, a $5,000 minimum investment may be required, while some can cost millions.
A person may decide to start an SPDA for a variety of reasons, including:
- If they were given an inheritance.
- After an employment separation, you received a 401(k) with a high sum.
- You recently sold a company.
A buyer of a single-premium delayed annuity can unlock the value of the contract in two ways. To create an income stream, the simplest and least expensive method is to simply annuitize. The other option is to add an optional rider, such as a guaranteed withdrawal benefit, which allows the annuitant to access the cash value of the annuity contract while maintaining a guaranteed income stream until death.
How Does an SPDA Work?
A deferred annuity is one that does not pay out immediately. You first fund the account, then begin receiving payments at a time that is convenient for you. Because annuities are frequently tax-deferred, they are subject to the same laws as other retirement plans that enjoy this benefit. You must wait until you are at least 59 1/2 years old before withdrawing funds, otherwise you may be charged a 10% penalty in addition to your regular income taxes.
Guarantees are also included with deferred annuities. In general, your account will not lose money even if the market has a terrible year; the minimum you can expect is nothing. There are no returns that are negative; however the cost of that assurance is the loss of some upside potential. If the stock market has a very good year, your gains may be limited to a certain amount, with the remainder going to the insurance provider.
Surrender penalties are built into this sort of annuity, encouraging you to keep your money invested for a long time. You’ll have to pay a surrender charge if you have to withdraw funds during the first 10 years, or whatever the insurer stipulates in the contract. Some insurers will allow a free withdrawal up to a particular amount and/or reduce the surrender cost each year until it is totally eliminated.
Finally, deferred annuities have a death benefit that guarantees the principal amount plus any gains to the beneficiaries. They are unable to accept anything less.
Single-Premium Deferred Annuities Have Many Benefits
Single-premium delayed annuities are meant for people who will not need access to the invested money for a long time. They are advantageous to investors who require consistent income and have a lump-sum amount to invest, such as cash savings, a substantial stock sale, inheritance, lottery winnings, tax refunds, bonuses or any other large financial injection.
Fixed-interest characteristics in SPDA products can provide dependable retirement income while also acting as a counterweight to market-based assets in a diversified financial portfolio. SPDAs may offer a guaranteed interest rate or a rate based on a stock market index, to be more specific. In the latter situation, the return has a 0% floor, which means that the annuitant cannot lose money in a down market.
When the market rises, the annuitant’s return is calculated using a formula based on the increase in the index. Simply put, single-premium deferred annuity owners can opt to limit their loss by foregoing some of their gain.
For many investors, a single-premium delayed annuity may be a considerably better place to place funds for a long period of time rather than low-interest savings accounts or cash. For one thing, interest income is taxed later. In addition, indexed SPDAs offer downside protection without compromising too much gain potential. This is in addition to the annuity benefit of a steady stream of payments that will never run out.
Is A Single Premium Deferred Annuity Worth it?
An SPDA provides a guaranteed, consistent income source later in life. This assurance makes financial planning much easier because it eliminates the risk if the financial markets collapse just before you retire, as well as other unforeseen risks. This fixed payment allows the financial advisor to develop a strategy that accurately estimates your monthly income as well as the tax implications. If you have questions or concerns regarding whether an SPDA is in your best interest to attain, please contact our team of professionals at Pillar Life Insurance for details and options.