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Immediate vs. Deferred Annuities

The difference is all in the timing: income now or income later.
If you buy an annuity , you can convert your assets into a stream of income and receive that income in regular payments during your lifetime. This feature distinguishes annuities from other individual retirement plans, such as traditional individual retirement accounts, which require you to make required withdrawals after you turn 72. Annuities also differ from other retirement plans because you can choose between an immediate annuity if you want the income right away, and a deferred annuity if you want to build your account value over time and convert it to income in the future.
Immediate Annuities: Pay in a lump sum NOW - start receiving payments NOW


When you buy an immediate annuity, you make a single lump-sum payment and set the starting date for the payout to begin sometime within the next 13 months — generally sooner rather than later. The term, or period of time that will be covered, and the amount you'll receive are laid out in the annuity contract. With an immediate annuity, you control the term: You can choose income for your lifetime (known as a life annuity), or for your lifetime and that of another person (known as a joint and survivor annuity). You can add a guaranteed period to either of these lifetime income payment options so that your beneficiaries will receive the payments remaining in the guaranteed period if you die before the end of the period. You can also choose one of the time-specific or amount-specific payout alternatives.


The size of the monthly payment you'll receive is set by the annuity provider based on:

  • The amount you use to buy the annuity, or annuity principal
  • The payout option you choose
  • Whether the annuity is fixed or variable
  • Personal factors, including your age and, if it's a joint and survivor annuity, the age of the other person
THE TIME TO BUY While you can buy a deferred annuity at almost any time, including after you retire, many experts advise that deferred variable annuities need to accumulate earnings for a period of time if they're going to provide a substantial level of income.


Immediate annuities offer some advantages that can make them attractive choices for retirement income. Specifically, they can help ease the fears people may have about managing a diversified investment portfolio or, even more scary, of outliving their resources. For example, someone who has just received a large sum of money — an inheritance, a bonus, or profits from selling a business — but really needs a steady source of income can choose an immediate annuity. In addition, annuity advocates suggest that people who expect a lump-sum pension or 401(k) distribution should consider an annuity as a way to convert their money into a stream of income they can't outlive.
Deferred Annuities: Save OVER TIME - start receiving payments LATER


A deferred annuity gives you the opportunity to build your retirement savings over a period of years. What you're deferring is the time at which you begin to receive income. In the period between signing the contract and converting your accumulated assets to a revenue stream, your principal is in either a fixed account, variable separate account funds, or both. Unlike an immediate annuity, which you must purchase with a lump sum, you can build your deferred account with a lump sum, a series of payments over time, or both. The ability to combine one-time and periodic contributions may give you added flexibility in building a larger retirement resource. But that alternative isn't always available. You continue to have access to your money in a deferred annuity until you convert your accumulated assets to a revenue stream. This means you can make limited annual withdrawals, or surrender the contract entirely, getting back its current value minus any surrender fees. But if you do withdraw, the money will be gone, and your retirement account will be reduced. You may also have to pay taxes on any increase in value and an early withdrawal penalty if you're younger than 59½.


Deferred annuities are especially appealing if you've put as much into your employer's salary reduction plan as you can but want to put away more for your retirement. And if you aren't earning income, a deferred annuity is one way for unearned income from your investments or other sources to grow tax deferred. There are no federally imposed annual limits to the amount you can contribute to a deferred annuity you purchase on your own — as there are with employer sponsored plans and IRAs — so you can contribute more when you have more on hand, for example as the result of a big bonus, a short-term, high-paying job, or other windfall.

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