Annuity Payout Options

by Grace W. Weinstein

When you've contributed all you're allowed to a 401(k), IRA, or other tax-qualified retirement plan, contributing to an annuity can be a good way to supplement retirement income.

Annuities have several advantages. Like tax-qualified plans, earnings are not subject to income tax until they are withdrawn. Unlike tax-qualified plans, there is no ceiling on contributions, so you can contribute as much as you like. And there is no "required beginning date," so you may delay the start of distributions from an annuity well into the retirement years.

When you are ready to start distributions, however, you will face a decision: How do you want the money? These are some of the choices you may find under your annuity contract:

• An individual "life annuity" makes payments as long as you live, so you can't outlive your income. On the other hand, payments stop when you die—even if that occurs the day after you receive your first payment.
• A "life annuity with period certain" guarantees payments for life but pays for at least a specified number of years.
• A "term certain" or "period certain" annuity makes payments for the period you elect and then stops. If you die before the end of the period, your named beneficiary or beneficiaries will receive payments for the remainder of the guaranteed period.
• A "joint-and-survivor annuity" makes lifetime payments to you and your spouse while at least one of you survives. Some contracts also offer a joint-and-survivor annuity with a term certain feature.
• "Systematic withdrawal," available under some annuity contracts, lets you arrange to receive designated amounts and change those amounts from time to time. You can't be sure of receiving lifetime income under this arrangement, but your beneficiaries will receive any amount left in the account when you die.

How much you will receive under any annuity depends on your age when distributions begin. The older you are, and therefore the shorter your life expectancy, the more you will receive.

But the amount also depends on the payment option you select. The largest payments are typically made under an individual life annuity—but this may not be the best choice if it will leave a surviving spouse in need of income. Your financial or tax professional can help you determine which choice is best for you.

Withdrawals from deferred annuities may be subject to ordinary income tax and may be subject to a 10% IRS early withdrawal penalty if taken before age 59½.

Source: CreativeLiving Magazine, Autumn 2002, The Northwestern Mutual Life Insurance Company, Milwaukee, WI