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The flexibility of an annuity is an important advantage that can help you manage your income in retirement.
The tax advantages of deferred annuities are intended to help you build assets for retirement. Consequently, there may be federal tax penalties if you withdraw your money prior to age 59½. If you have reached retirement age and are no longer subject to a surrender charge on your annuity contract, the following are some options for withdrawing your money.
This is called surrendering your contract. This option may be the least effective from a tax or income management standpoint. You bear tax liability for your earnings at ordinary tax rates, and this bill could be substantial. You also lose the option to choose annuitization and a guaranteed income for life.
This option keeps your money growing tax deferred while allowing you to draw income. You can select a systematic withdrawal plan to receive a set income regularly, and may also be able to make new investments. A drawback to this option is that there's no guarantee you won't outlive your money. Your variable investments may lose value, or there may not be enough money to last for the rest of your life.
This option also keeps your money growing tax deferred while allowing you to draw income from your annuity. Keep in mind that making withdrawals at random intervals may affect your ability to plan for your financial future or accurately predict how long your money will last.
You can convert your annuity into a guaranteed income plan. This is called annuitizing your contract. You can choose income for life, income for a specific time period, or a specific income amount. An overview of many annuitization options follows on the next page.
In most cases, withdrawing money before retirement is an inefficient use of an annuity, but you may need access to your money for emergencies. Many annuities allow you to withdraw a limited amount each year without charge.1 They may also offer exceptions to withdrawal charges in cases of hospitalization or terminal illness. These exceptions will vary according to the contract and issuing company.
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