How Soon Can Benefit Payments Begin With a Deferred Annuity?
Navigate the path to receiving income from your deferred annuity. Learn the key considerations for initiating your benefit payments.
A deferred annuity is a long-term financial contract, typically with an insurance company, designed to accumulate funds on a tax-deferred basis for future income. It has two distinct periods: an initial phase for tax-deferred growth, and a subsequent phase for receiving regular payments. This article explores when these payments can begin.
The Accumulation Phase of a Deferred Annuity
The accumulation phase is the initial period where the annuity owner contributes funds, either as a lump sum or through a series of payments. During this phase, funds grow without annual taxes on dividends, interest, or capital gains, allowing for effective compounding. Taxes on earnings are postponed until funds are withdrawn or payments begin. The purpose of this phase is to build a financial reserve for a future income stream.
Factors Influencing When Payments Can Begin
Several factors dictate when payments from a deferred annuity can begin, including contractual terms and tax regulations. Annuity contracts typically specify a minimum age at which the annuitant can elect to begin receiving payments. While there is no federal minimum age for purchasing or annuitizing an annuity, insurance providers set their own minimum ages, which can vary (e.g., age 55 or 60).
A significant consideration is the Internal Revenue Service (IRS) rule regarding distributions before age 59½. Taking withdrawals from the earnings portion of an annuity prior to this age generally incurs a 10% federal tax penalty, in addition to regular income tax. Though early withdrawals are possible, this penalty aims to discourage using annuities for short-term savings. Exceptions exist, such as withdrawals due to disability or if payments are structured as substantially equal periodic payments over one’s life expectancy.
Annuity contracts also include a maximum age by which annuitization, or the conversion of the accumulated value into income payments, must occur. This maximum age is typically set by the insurer and can range from around age 95 to 100. If the annuitant does not elect to begin payments by this age, the annuity may automatically annuitize according to the contract’s terms. The annuity owner generally has flexibility to choose their income start date within these boundaries. The type of deferred annuity (fixed, variable, or indexed) influences fund growth but generally adheres to the same core age and tax rules for payment initiation.
Initiating Your Annuity Payments
To begin receiving income from a deferred annuity, contact your annuity provider to express your intent to annuitize the contract. This converts the accumulated value into a stream of regular payments.
The annuity provider will then require specific documentation and forms to process the annuitization request. These forms, which can often be found on the insurer’s website or requested directly, detail the desired income start date and chosen payout option. The owner will provide personal details and make elections regarding payment structure and beneficiaries.
Upon submission of all necessary paperwork, the annuity company reviews the request and sets up the payment schedule. This processing can take several business days, with some providers indicating a typical timeframe of approximately five business days. The provider will then issue a confirmation of annuitization, outlining the selected payout option, payment amount, and schedule for the first payment.
Payout Options and Payment Structures
After annuitization, the accumulated value in the deferred annuity converts into a structured stream of income payments. Several common payout options determine how these payments are distributed:
Life Only: Provides payments for the annuitant’s entire lifetime, ceasing upon death. This option typically offers the highest periodic payment amount because it does not include provisions for beneficiaries.
Life with Period Certain: Guarantees payments for the annuitant’s lifetime and for a specified minimum period (e.g., 10 or 20 years). If the annuitant dies before the guaranteed period ends, remaining payments are made to a designated beneficiary. This option balances lifetime income with a guaranteed payout duration for heirs.
Joint and Survivor: Provides payments for the lifetime of two individuals, typically spouses. Payments continue as long as either the annuitant or the designated secondary annuitant is alive. This ensures a continuous income stream for the surviving individual, though the periodic payment amount is usually lower than a single life option.
Fixed Period (or Period Certain Only): Provides payments for a predetermined number of years, regardless of the annuitant’s lifespan. If the annuitant dies before the period ends, remaining payments continue to a beneficiary.
While not a continuous income stream, the accumulated value can also be taken as a Lump Sum withdrawal. This option provides immediate access to the entire accumulated value, but it is subject to immediate taxation on all earnings and may incur surrender charges from the insurer, depending on the contract terms. This can also lead to a higher tax liability in the year of withdrawal.