SPDAs (Single Premium Deferred Annuities) are a type of deferred annuity that receives little attention. SPDAs are designed to be used when you have accumulated a sizable fund but don’t need to withdraw your money within the near future.
SPDAs work to expand your money while postponing taxes and assuring a secured rate of return. This type of annuity starts with a single lump-sum premium that can increase tax-free with a fixed rate, the growth rate of a specified portfolio of assets or a rate based on a market-based index .
Who Should Consider A SPDA?
After you’ve explored all the other tax-advantaged retirement saving choices, such as 401(k) plans and IRAs, an annuity should normally be considered. If you have additional money to put up for retirement and are presently in a high-income tax bracket, the tax-free growth and payout of an annuity may be beneficial.
Annuities come with a variety of drawbacks such as the need to lock money away for a long period of time. Early withdrawal can be subject to surrender charges of upwards of 10% of the amount withdrawn. Annuities frequently impose other significant fees, such as an upfront commission of between 1% and 10% of your premium.
These pricing methods may be difficult to comprehend. Insurance agents may also emphasize the benefits while trying to downplay the drawbacks, so make sure you ask many questions and properly study the annuity plan first.
Compare that cost structure to standard no-load mutual funds that have no sales commissions or surrender charge and typical annual charges of less than 0.5% (for index funds) or approximately 1.5% (for actively managed funds), and decide if you’ll be better off doing it yourself.
Why SPDA Can Be Beneficial
It’s also important to understand the type of income generated by your portfolio. If most of the income is in the form of dividends and not capital gains, the tax deferred growth of an annuity may outperform your portfolio, However, if most of your income is long term capital gains, the calculations may come out the other way.
If you anticipate retiring within 10- 15 years, and you have retirement funds in a market-based vehicle that might fall in value because of stock volatile markets, you should consider investing in an SPDA. In this situation, an SPDA would safeguard your principal and earned interest against stock market declines while also enabling you to transfer your holdings into a secured lifetime income stream after retirement through annuitization.
You can also include a fixed withdrawal benefit rider, that will give you a lifelong income stream without requiring annuitization. These add-ons are not offered in all states or on all items, and may not also be available at all times.
If you have funds in a conservative savings account, an SPDA could be a suitable option. The annuity’s interest is tax-deferred, and with indexed SPDAs, you can get bigger interest credits when the index outperforms while remaining protected by 0% floor if the markets do not perform well.
If you’ve recently obtained a lump sum of money through a tax return, inheritance, bonus or another source, a non-qualified SPDA could be a suitable option for long-term savings. Taxes on the lump sum payment would already have been paid in this situation, but taxes on interest earned would be deferred, and you would still be able to use all of the SPDA’s other advantages.
If you’re concerned about outliving your funds, an SPDA certainly makes sense as a cornerstone of your financial strategy. With annuitization or the installation of a fixed withdrawal benefit rider, you can convert your savings into a flow of revenue that will never run out. The most significant benefit of this product is that it offers assurances and warranties, giving you piece of mind.
Do You Need Guidance?
People with varying circumstances may benefit from a single premium delayed annuity. Understanding how SPDAs work and the advantages they provide is the first step to securing your future. Find out more about annuities by contacting our reliable and helpful staff of professionals at Pillar Life Insurance today.