Managing Your Annuity at Maturity

From variable to fixed annuities, millions of people buy annuity contracts for many reasons. These purposes range from lifetime income to asset protection and tax-advantaged growth. As a contract, each annuity has a different time period that it takes to mature.

Depending on what you buy, your annuity may have a maturity period that goes only for a few years. If your annuity has more benefits or the benefits are guaranteed for a longer time, its maturity period can be as long as 15 years.

But what about when you are on the backend? What should you do with your annuity at maturity? Annuity owners have a variety of options when they reach that point.

Depending on your age, financial situation, and the goals that you have for your annuity money, you can do the following when the contract ends:

• Keep your money in the contract and withdraw it at strategic times (or a certain withdrawal schedule),
• Cash it out in a lump-sum balance,
• Renew your contract,
• Annuitize your contract into an irreversible income stream, or
• Transfer the money into a new annuity contract.

Let’s go into more details about what you can do when your annuity contract matures.

Keep Your Money in the Contract

Once your contract has matured, you can choose to keep your money in the annuity.

You won’t receive any checks from the life insurance company. That is, unless you opt to withdraw money on your own or start your income payments according to a definitive withdrawal schedule set by the insurer.

Assuming your annuity is a fixed-type contract, the insurance company will continue to put your money into low-risk, interest-earning assets. For many insurance companies, the bulk of the money will be in Treasury securities and investment-grade corporate bonds.

You will continue to earn interest, but these interest earnings may be lower than what you had during the maturity period. It will also depend on whether your annuity comes with a guaranteed fixed interest rate.

Your interest earnings may also be higher, if interest rates have gone up from when you first bought the contract. This is an outcome that is influenced by interest rate risk.

Alternatively, your growth potential could be tied to an underlying financial benchmark, if you have a fixed indexed annuity.

Cash Out in a Lump-Sum Balance

As the contract owner, you have the option to completely cash out your annuity. This involves taking all of the money out of your contract in a lump-sum balance.

While providing you with complete liquidity, your cash-out could be subject to income tax. It depends on the tax status of the money with which you started your annuity.

If your annuity is funded with IRA money, your entire lump sum could be taxable. If you bought it with personal savings or proceeds from an asset like a home, only the money you earned from the annuity’s growth might be taxable.

Check with an experienced tax advisor for guidance with your situation and any tax implications you might have. But all money that is taxed in any annuity is always taxed as ordinary income.

In other words, you will pay tax on it at your top marginal tax rate.

If you are younger than 59.5 years old, your cash-out will also be subject to an early withdrawal penalty of 10% by the IRS. If you are beyond this age point, this penalty won’t apply to your balance.

Renew Your Contract

You can also opt to ‘renew’ your contract for “renewal rates” offered to you by the insurance company. But these renewal rates may be higher or lower than what you received prior, depending on current market conditions.

For example, say interest rates are higher than when you first started your contract. Then you may well receive higher renewal rates on the backend.

Alternatively, should interest rates be lower, your renewal rates will probably be lower than what you had before. What’s more, your renewal rates can take different forms depending on the annuity you have.

With a traditional fixed annuity, your interest rate will be a guaranteed fixed rate. This also goes for a multi-year guarantee annuity.

With a fixed index annuity, the renewal rates will be on the uppermost limits that your money can grow — participation rates, caps, or spreads.

Annuitize to Create an Irreversible, Guaranteed Income Stream

All annuities have the ability to be annuitized. Or, in other words, they can have their present lump-sum value be converted into a series of payments over time.

Some annuities, such as immediate annuities, have only this option for receiving income. Other annuities, such as fixed and indexed annuities, have this as one option among a variety of income payout options.

Those annuities also have an “accumulation period,” or a timespan where your money grows before you start receiving income from the life insurer.

Annuitization locks you into a guaranteed monthly paycheck that the insurance company is obligated to pay you for the rest of your life. But there are some potential downsides to this.

Once you annuitize your contract, you can’t take it back. Not only are you stuck with this monthly amount, you also give up control of the liquidity in your contract in exchange for the guaranteed lifetime payments.

This is a primary reason that fewer than 5% of annuity owners choose to annuitize their contracts.

What if you are younger than 59.5? If so, there are certain exemptions that can let you annuitize your contract and receive income payouts from your annuity without the early withdrawal penalty being triggered.

Transfer the Money into a New Annuity

You may also want to move out of your current annuity contract and into a new contract. Maybe you have a variable annuity and want a new annuity option that better protects your money from market risk.

Maybe you want higher payout options for income than what your current annuity offers. Or you may want the higher growth potential of an fixed index annuity or a variable annuity, which can earn more interest than what your old plain-vanilla fixed annuity offers.

If your annuity is funded with IRA money, you can transfer or roll over your IRA money in the annuity to a new contract. What happens if you bought your annuity with after-tax dollars? Then you can do what is called a “1035 exchange” to move that money into a new annuity of your choosing.

Make sure that regardless of the tax status of your annuity, a transfer or exchange is the best way to move your money over in a tax-efficient manner. Following the right transfer or exchange strategy will help ensure that your money movement is tax-free and penalty-free.

Your financial professional and your tax advisor can help you facilitate this.

Making the Right Decisions for Your Financial Well-Being

Annuities can have lots of moving parts and can give you lots of choices. But with the right financial professional’s help, they can help shorten the gap between your goals and the progress you have already made toward them.

If you are looking for someone’s guidance, many financial professionals are available at SafeMoney.com to assist you. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.