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Layin’ It on the Line: Should a deferred income annuity have a place in your retirement plan?

By Lyle Boss - Special to the Standard-Examiner | Feb 9, 2022

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Lyle Boss

“Does a deferred income annuity have a place in your retirement plan? It might fit in your portfolio like a glove.” — Lyle Boss

If you’re looking for payments that begin on a future date and continue for the rest of your life, your spouse’s life or for a specific period, you might consider a deferred income annuity, or DIA.

DIAs offer several distinct advantages over other kinds of safe money products. You won’t need to keep your eyes on the stock market, track interest rates or calculate dividends. If you desire lifetime guaranteed income that you can’t outlive, a deferred income annuity will accomplish that. Having a DIA can give you more peace of mind knowing you will have a predictable income stream available when you no longer work.

For some, DIAs are an excellent selection for their retirement portfolios because they help defer taxes until later when you could be taxed at a lower rate. Other types of annuities are front-loaded, meaning you pay taxes upfront, perhaps at a higher rate.

DIAs are guaranteed by the issuing insurance company’s assets and are not subject to the ups and downs of the stock market. Also, since deferred income annuities don’t have account management and additional fees, ALL of your premium payments go to your monthly income.

When you choose a DIA, you decide how frequently to receive payments. Typically, deferred income annuity buyers can set payments for every month, yearly or quarterly.

Although DIAs are a less complicated safe money product, they are still highly customizable. Improvements in the DIA product mean that you have options to make your DIA do more for your retirement.

One question about annuities is what happens to your funds when the annuitant dies? Does the insurance company stop making payments? Do loved ones lose all the money put into the annuity? Customization allows payments to continue to designated beneficiaries, so it will enable guaranteed income to continue. There are many other ways to customize your annuity, including extending coverage for a guaranteed period, adding a second person to the annuity and others. An annuity specialist can help customize one just for you and your circumstances.

Tax issues

How your annuity proceeds are taxed depends on how you fund it. For example, you can purchase a deferred income annuity with proceeds from selling stocks or bonds, a business or a home. You might also use cash from a maturing CD or money you’ve saved in a deferred annuity account. When you fund a DIA with lump-sum distributions from a defined benefit or defined contribution plans, SEPs, IRAs, 1035 exchanges or Section 403(b) plan, the annuity is now a “Qualified Deferred Income Annuity.” You could also use a lump sum from a tax-qualified account, such as a 401(k) or traditional IRA. Remember to talk with your tax expert since your plan has been growing tax-deferred and your payments will be taxable income.

Nonqualified deferred income annuities have not been tax-sheltered. They are funded with monies on which you have already paid taxes. Examples of non-qualified annuity money can come from selling a house, mutual fund, business or other investment. They might also make sense if you receive large inheritance or proceeds from an insurance settlement.

When you start receiving annuity payouts from a nonqualified annuity, a portion of each payment is considered a return of principal and excluded from taxation. The amount excluded is calculated according to an “exclusion ratio.” You can usually find the details of the exclusion ratio on any quotes you get. Be sure to have your annuity professional explain this to you carefully before deciding on any product or company.

The bottom line: Deferred income annuities are an option for people looking to create a pension-like source of reliable income. Like a variable annuity, you won’t access your money for a specific number of years, allowing it to grow. Like an immediate annuity, DIAs have fixed payouts for life. Customization options will enable you to solve other issues, including ensuring income for a spouse or beneficiary.

If you are looking into deferred income annuities, speak with your qualified local expert experienced with the many types of annuities available. They will evaluate your needs and goals to determine if a DIA will solve the most critical issues.

Lyle Boss is a member of Syndicated Columnists, a national organization committed to a fully transparent approach to money management. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.


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