When Does an Annuity Mature and What Happens Next?

An annuity is a financial contract established with an insurance company, designed to provide a steady stream of income, often during retirement. This financial product typically involves two distinct phases: an accumulation phase where funds grow on a tax-deferred basis, and a payout phase, during which the annuitant begins to receive regular payments.

Annuities serve as a tool for long-term savings, offering a way to convert a lump sum or series of payments into guaranteed future income. They help individuals manage the risk of outliving their savings in retirement by providing a predictable income stream, which can supplement other retirement funds like Social Security or pensions.

Understanding Annuity Maturity

Annuity maturity refers to the point when the accumulation phase of a deferred annuity concludes, and the contract is ready to begin distributing funds. This signifies a transition from saving and growing assets to accessing them as income or a lump sum. For deferred annuities, reaching maturity means the contract has fulfilled its initial purpose of capital accumulation.

Immediate annuities, in contrast, do not have a separate maturity point. With an immediate annuity, payments typically begin within one year of purchase, meaning the contract essentially enters its payout phase almost immediately. The concept of maturity primarily applies to deferred annuities, which are designed to grow funds over an extended period before distributions begin.

The maturity date is a significant contractual term as it marks the formal end of the tax-deferred growth period for the accumulated value. At this juncture, the annuity owner gains access to the accumulated funds and must make decisions regarding their distribution.

Determining Annuity Maturity Dates

The maturity date for an annuity is a specific term outlined within the annuity contract itself. This date can be determined in several ways, often based on either the annuitant’s age or a set number of years from the contract’s purchase. Many contracts specify a maturity age, which can range from a common age like 85 or 90.

Alternatively, the maturity date might be set for a predetermined number of years after the annuity was purchased, with common terms ranging from 10 to 30 years. While a contractual maturity date is established, annuitants often have flexibility. They can elect to begin receiving payments earlier than the stated maturity date or, if permitted by the contract and regulations, defer the start of payments beyond this date. For deferred annuities, the maturity date is a crucial planning point.

Actions at Annuity Maturity

When an annuity reaches its maturity date, the contract holder is presented with several options for the accumulated value.

Annuitization: The accumulated value is converted into a guaranteed stream of income payments. These payments can be structured in various ways, such as for the annuitant’s lifetime, for a specified period, or as joint and survivor payments covering two lives.
Lump-sum withdrawal: This option provides immediate access to all funds, though it may have significant tax implications.
Partial withdrawal: This involves taking out only a portion of the funds while leaving the remainder to continue growing within the contract or for future annuitization.
Roll over or transfer: Funds can be moved to another annuity contract, often with a different provider or with new terms.
Continued deferral: The annuitant can delay making a distribution decision beyond the initial maturity date, allowing the contract to potentially accumulate additional value.

Tax Considerations for Annuity Maturity

The tax implications at annuity maturity depend largely on whether the annuity is qualified or non-qualified. Non-qualified annuities are funded with after-tax dollars. When withdrawals are made from a non-qualified annuity, only the earnings portion is subject to ordinary income tax. The Internal Revenue Service (IRS) generally applies a “last-in, first-out” (LIFO) rule, considering earnings withdrawn first.

For non-qualified annuities that are annuitized into a stream of payments, a portion of each payment is considered a tax-free return of principal, while the remainder is taxable earnings. This is determined by an exclusion ratio, which accounts for the original investment relative to the expected total payout. Qualified annuities, conversely, are typically funded with pre-tax dollars, often through retirement plans like IRAs or 401(k)s. As such, both the original contributions and any earnings are generally taxed as ordinary income upon withdrawal in retirement.

A direct transfer of funds from one annuity contract to another, known as a 1035 exchange, is generally a tax-free event. Additionally, withdrawals made from any annuity before the age of 59½ may be subject to a 10% early withdrawal penalty on the taxable portion.