For many Americans, preparing to retire takes decades of investing and careful saving so you have the income you need to support your lifestyle. And once that retirement begins, you have to start collecting on your investments into annuities. As you plan for taking withdrawals, here are some key questions to address:
1. At what age can I take withdrawals without penalty?
You can start receiving annuity payments without tax penalty once you turn 59 1/2 years old.[i] Congress set this limit in order to encourage long-term retirement savings. If you do take payments before you turn 59 1/2, you’ll have to pay both a 10% early withdrawal penalty and regular income tax on your investment earnings. But, you won’t have to pay tax on the amount you contributed to your annuity.[ii]
2. How will my payment be taxed?
Once you start taking withdrawals, the federal government taxes your payments as ordinary income, rather than treating the payments as capital gains.[iii] Ordinary income includes money you receive from business and personal income, such as: wages, salaries, commissions, and interest income from bonds. Unlike with capital gains, you cannot account for capital losses with ordinary income.[iv] In addition, your income and filing status will dictate your tax bracket, and the higher your ordinary income, the higher your tax rate.[v]
3. What payout structures are available to me?
As the owner of your annuity, you choose how you want to receive payments from three different methods.[vi]
If you chose the annuitization method, you will have some form of guaranteed monthly income for a determined period. You have a variety of ways to receive these payments, which include[vii] the following structures:
• Life Option
• Joint-Life Option
• Period Certain
• Life With Guaranteed Term
Knowing which structure you own will guide what payments are available to you.
Systematic Withdrawal Payment
This payment approach allows you to select how much money you want to take each month and how many payments you want to receive. Be aware though: Insurance companies do not guarantee the funds paid out through this approach; since you choose your schedule and amount, they can not be sure that your distributions will cover you throughout your lifetime.[viii]
You also have the option to take all of your money in a one-time payment. While this choice could be helpful if you need a large amount of funds upfront, you will greatly increase your tax liabilities with this structure, since the ordinary income tax will affect the entire payment you receive.[ix]
Remember, your unique financial life will guide what strategies best help you reach your goals. To explore which withdrawal options are available to you — and what tax liabilities you may need to account for — feel free schedule a consultation. Contact us at (518) 581-1642 today.