At What Age Does an Annuity Start Paying Out?

An annuity is a financial contract with an insurance company. It involves making payments for regular disbursements at a later date. Annuities provide consistent income, particularly during retirement, helping individuals avoid outliving savings. Understanding when an annuity begins paying out is a significant aspect of its purpose.

Immediate Versus Deferred Annuities

The timing of annuity payouts depends on whether the annuity is immediate or deferred. Immediate annuities begin payments soon after a single payment. These payments typically start within one year of purchase. This annuity suits individuals already in retirement or nearing it who need immediate income.

Deferred annuities involve two phases: accumulation and payout. During accumulation, funds grow on a tax-deferred basis, allowing tax-deferred growth. The payout phase (annuitization) begins at a future date chosen by the contract holder, many years after contributions. The owner determines when to trigger the income stream from a deferred annuity.

Minimum Payout Age and Early Access

Annuity holders can begin payouts from a deferred annuity at their chosen time, but age thresholds have financial implications. For annuities funded with pre-tax money, withdrawals or payouts initiated before age 59½ are generally subject to a 10% early withdrawal penalty on the taxable portion. This penalty is in addition to any ordinary income taxes due on the distribution.

For non-qualified annuities, funded with after-tax money, the 10% penalty for early withdrawals before age 59½ applies only to the earnings portion, not the original principal. While the contract holder decides when to begin income, accessing funds before age 59½ often incurs this federal penalty. Exceptions to the 10% penalty exist, such as distributions due to disability or a series of substantially equal periodic payments.

Common Payout Ages and Retirement

Individuals often align their annuity payout age with significant retirement milestones or financial planning objectives. Many choose to begin receiving annuity income around age 62, which is the earliest age at which Social Security benefits can be claimed. This allows for coordination between different income streams. Another common age is 65, widely recognized as a traditional retirement age and the age of Medicare eligibility, often serving as a target for many retirement income strategies.

Some annuity owners opt to delay payouts until age 70 or even later. Delaying income can be motivated by a desire to maximize the individual payment amounts, or to align with the latest age for claiming Social Security benefits. For qualified annuities, the IRS also mandates Required Minimum Distributions (RMDs) beginning at age 73, which can influence payout decisions for some individuals holding these types of contracts. The choice of payout age is a personal decision, shaped by an individual’s financial situation and income needs during retirement.

How Payout Age Affects Income

The age at which an annuity begins paying out directly impacts the amount of each payment received. Starting payouts at an earlier age, such as 60, generally results in smaller individual payments. This is because the income stream is expected to be distributed over a longer period, given the annuitant’s longer remaining life expectancy. The insurance company calculates payments based on the total amount to be distributed over the expected duration of the income stream.

Conversely, deferring payouts until a later age, such as 70, typically leads to larger individual payments. A later start means the income stream is anticipated to last for a shorter duration, allowing each payment to be larger. Factors such as the annuitant’s life expectancy, prevailing interest rates at the time of annuitization, and the specific terms of the annuity contract also influence the payment amounts. The payout rate, which is the percentage of the annuity’s balance paid out annually, generally increases with the annuitant’s age at the start of payments.

Tax Considerations of Payouts

The tax treatment of annuity payouts depends on how the annuity was funded. “Qualified” annuities are typically funded with pre-tax dollars, often through retirement accounts like IRAs or 401(k)s. When payouts begin from a qualified annuity, the entire distribution amount is generally taxable as ordinary income. This means both the original contributions and any earnings are subject to income tax because they have not been taxed previously.

“Non-qualified” annuities are funded with after-tax dollars. For these annuities, only the earnings portion of the payout is taxable as ordinary income; the return of the original principal is tax-free. The IRS generally treats withdrawals from non-qualified annuities on a “last in, first out” (LIFO) basis, meaning earnings are considered to be withdrawn first and are therefore taxable before the tax-free return of principal.