Definition
A deferred-payment annuity, also known simply as a deferred annuity, is a type of annuity contract that delays income payments to the annuitant until a future date. This periodical delay can be tied to a specific number of periods or until the annuitant reaches a certain age. The deferment period allows the investment within the annuity to grow potentially tax-deferred, which can be beneficial for long-term retirement planning.
Examples
Retirement Savings: John, aged 45, purchases a deferred-payment annuity that begins payouts when he turns 65. During the deferment period, his funds grow tax-deferred, providing him with an additional income stream upon retirement.
College Fund: Maria buys a deferred-payment annuity when her daughter is 5 years old, set to start payments when her daughter turns 18. This can help fund her daughter’s college tuition through the accumulated value of the annuity.
Frequently Asked Questions
1. What are the primary benefits of a deferred-payment annuity?
One of the main benefits is the tax-deferred growth of the investment, which means that taxes on earnings are postponed until withdrawals begin. Additionally, it provides a predictable income stream during retirement.
2. Are there any penalties for early withdrawal?
Yes, most deferred annuities come with surrender charges if withdrawals are made before a certain period, typically within a specified surrender term. Additionally, withdrawing funds before age 59½ may result in a 10% early withdrawal penalty for tax purposes.
3. What types of deferred annuities exist?
Deferred annuities can be variable, fixed, or indexed. Fixed deferred annuities offer guaranteed interest rates, while variable annuities’ returns depend on the performance of the selected investments, and indexed annuities provide returns linked to a market index.
4. Can one convert a deferred-payment annuity into an immediate annuity?
Yes, many deferred annuities offer options to convert into an immediate annuity, providing immediate income payments rather than waiting until the end of the deferment period.
5. How are deferred-payment annuities taxed?
Earnings grow tax-deferred, but once withdrawals begin, the earnings portion of the payments is taxed as ordinary income.
Related Terms with Definitions
Annuity: A financial product that provides a series of payments made at regular intervals, often used as part of a retirement strategy.
Contract: A formal agreement between two or more parties that is enforceable by law.
Annuitant: The individual who receives payments from an annuity.
Deferment Period: The time interval between the purchase of the annuity and the start of the payout phase.
Online References
Suggested Books for Further Studies
- Annuities for Dummies by Kerry Pechter
- The Smartest Retirement Book You’ll Ever Read: Achieve Your Retirement Dreams–in Any Economy by Daniel R. Solin
- The New Retirementality: Planning Your Life and Living Your Dreams…at Any Age You Want by Mitch Anthony
Fundamentals of Deferred-Payment Annuities: Finance Basics Quiz
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