In discussing annuities with people, oftentimes they think you put money into an annuity and it is difficult to get it out. But, there are several ways you are able to withdraw funds from an annuity. Some annuities have more flexibility than others, depending on if you have a qualified account (monies that have not been taxed, like retirement funds) or a non-qualified account (money that has been taxed, such as personal savings, profits from a sale, inheritance, etc.). There are many ways you can withdraw monies from an annuity, below are three of the most common.
If you are under 59 ½ and have a qualified account, the government will give you a penalty for an early withdrawal. You will be required to pay Uncle Sam a 10% early withdrawal penalty, not to mention that the monies withdrawn will be counted as income. However, let’s suppose you’re over 59 ½ and would like to withdraw from your account. You would have a couple of options. If you simply have an emergency or a need for additional monies, most annuity contracts have a 10% free-withdrawal provision. This will allow you to take 10% of your balance without incurring a withdrawal fee. The monies withdrawn will be counted as income, but you will not have to annuitize your account. By taking a free withdrawal, your account will still continue to gain interest.
Many consumers choose to place monies that have all ready been taxed in a non-qualified annuity. The money placed in this account will grow tax-deferred. No matter what age you are, you can use the 10% free withdrawal provision. The insurance company will send a 1099 at the end of the year for tax purposes. Most insurance companies will allow you to do this until you have withdrawn up to 50% of the value in your account. Because the monies in this account are after-tax dollars, you are not held to IRS guidelines. This means that most insurance companies will establish a lifetime income for you once you’re over age 50. Many people who retire early will use this concept as a bridge until they get to 59 ½.
“Private Pension”/Income Riders:
The government requires each of us to begin taking monies from a qualified retirement plan at age 70 ½. Using this concept, those people who are at age 70 ½ and are not in need of an income stream can use the annual free-withdrawal provision and comply with government regulations. Over the last 10 years, the fixed indexed annuity concept has become very popular among consumers. These products have evolved a great deal, with one of the more common features being the Lifetime Guaranteed Income Option. This rider, which is offered by many of insurance companies, will allow you the ability to begin an income stream at any time after reach 59 ½. In most cases, once the income stream begins, your income is locked in at that figure for the rest of your life. In essence, the longer you can delay beginning an income stream, then the larger your payout will be. The percentage of the payout you receive is based on the government guidelines that each insurance carrier must follow. Depending on age, this ranges from 4-7% of your balance. They can give a higher payout but not lower. Keep in mind that if you need more monies than what the payout provides, you can take the difference each year up to 10% from your annuity without penalty. For example, if the government/insurance company provides you with a 5% payout, you can take an additional 5% from your account value.
Long-Term Care Benefits:
Several insurance companies have recently adopted various types of health care riders that can be added to your annuity. Depending on the company, you may be offered a critical illness rider, a home health care/long-term care rider, and even an accident rider. Some are built into the annuity, there is not a fee, and other companies will charge an annual percentage based on the value in your account.
These types of riders will allow you the opportunity to withdraw additional monies from your account without being charged a withdrawal fee. In some cases, the insurance company will pay you up to twice the amount of what your wills normal payout would be if one of these life events would occur.