What to Do With an Annuity That Has Matured

An annuity is a contract where payments are made to an insurance company for future regular disbursements. Upon maturity, the annuity’s accumulation phase ends, transitioning to its payout phase. Funds become available for access or conversion into a steady income stream.

Available Options at Maturity

Upon an annuity’s maturity, several options are available for the accumulated value.
One option is a lump sum distribution, providing the entire accumulated value in a single payment for immediate access and use.

Alternatively, you can annuitize the contract, converting the value into a predictable stream of regular payments. These can last for a specific number of years (period certain) or for the annuitant’s life. Payout structures include single life or joint life options.

A third option is a 1035 exchange, allowing a direct transfer of funds from the matured annuity into a new contract. This transfer can be with the same or a different insurer. This continues tax deferral on gains, enabling further growth without immediate taxation.

Finally, you may leave funds with the current insurer without distribution or annuitization. These funds might remain in a holding account or continue to accumulate interest, often at a lower rate. This offers flexibility while deferring immediate decisions.

Tax Implications of Each Option

Understanding the tax implications of each maturity option is important.
For a lump sum from a non-qualified annuity, earnings are taxed as ordinary income. The initial premiums (cost basis) are returned tax-free. IRS rules apply a “last-in, first-out” (LIFO) method, taxing earnings first.

For qualified annuities, such as those in an Individual Retirement Account (IRA), the entire distribution is generally taxed as ordinary income upon withdrawal, unless contributions were after-tax. Withdrawals before age 59½ may incur an additional 10% federal income tax penalty on the taxable portion.

When an annuity is annuitized, each payment includes a non-taxable return of premium and taxable earnings. The “exclusion ratio” determines the tax-free percentage, calculated by dividing the investment (cost basis) by the expected total return. This ensures principal is returned tax-free while earnings are taxed.

A 1035 exchange allows a tax-free transfer of funds from one annuity to another, per IRS Code Section 1035. Accumulated gains are not immediately taxed, and the cost basis carries over. To qualify, the transfer must be direct between insurance companies, without the funds passing through the annuity holder’s control.

Leaving funds with the insurer allows continued tax deferral on accumulated earnings. No immediate income tax is due as long as funds remain within the contract. Accruing interest or earnings continue to grow tax-deferred until distribution.

Key Considerations for Your Decision

When deciding how to handle a matured annuity, evaluate your personal circumstances and future needs.
Consider your current and future income needs. Determine if immediate, regular income is required or if other income sources are sufficient to guide your choice between a lump sum and annuitization. Assess existing income streams to see how annuity funds can supplement your finances.

Long-term financial goals also shape this decision. Consider how annuity funds align with broader retirement planning, such as funding specific expenses or supplementing Social Security benefits. Estate planning, including the desire to leave a legacy, influences whether to preserve principal for beneficiaries or convert it into a lifetime income stream.

Risk tolerance is another factor. Some prefer the certainty of guaranteed income from annuitization, avoiding market volatility. Others may prefer the flexibility and potential for greater growth by taking a lump sum and reinvesting it, accepting investment risks.

Liquidity is also important. A lump sum distribution provides immediate access to the principal, offering flexibility for unexpected expenses or investment opportunities. Annuitization limits access to the principal, providing scheduled payments instead.

Health and longevity prospects can influence annuitization payout options. Those with a longer life expectancy might favor lifetime income. Individuals with health concerns might opt for a period certain payout to ensure funds are distributed within a specific timeframe. Understand how each option impacts beneficiaries and your overall estate plan.

Initiating Your Chosen Action

Once you decide on your matured annuity, initiate your chosen action.
Contact your annuity provider, typically the insurance company or your financial advisor. They are your primary contact for administrative procedures.

Request the specific forms for your chosen action: a lump sum distribution, annuitization, or a 1035 exchange. Each option has distinct paperwork. Clearly specify your intention to receive the correct documentation.

Carefully complete and submit the required paperwork. Fill in all necessary fields, provide signatures, and attach any requested supporting documents. Forms can be submitted via mail, online portals, or in person, depending on the provider.

Understand the typical processing timelines. A lump sum distribution can often be processed within 7 to 14 business days once forms are submitted. Annuitization may take a similar timeframe to set up initial payments. A 1035 exchange could take several weeks, potentially 30 to 45 days, due to coordination between financial institutions.

Seek professional guidance from a qualified financial advisor or tax professional before finalizing any action. They can provide personalized advice based on your situation and ensure your chosen path aligns with your financial and tax planning objectives.