Tips to Keep in Mind When Managing Your Annuity Income

For many people planning for retirement, investing into annuities is a helpful strategy to build guaranteed income. Once you take retirement distributions, you receive a set amount based on details like the annuity you purchased and amount you contributed. You’ll need to navigate some fees and taxes as you receive annuity income. With that in mind, here are tips to help you manage your annuity distributions.

Know What Fees to Expect

Like many investments, annuities carry various fees both when you purchase them and while owning them. When you receive income, you will still have some fees to pay on those distributions. While fees may vary, here are couple items you may be liable for:

·       Surrender Charge: When investors withdrawal their money before the planned distribution date they agree to pay a surrender charge. The fee varies by provider and annuity type, but the average rate for the first year of your withdrawal is around 10% of your total invested funds.[i]

·       Administrative Fees: When you receive income payments, the investment manager holding your annuities will still play an active part in your disbursements. To help cover the expenses of managing your annuity, you will continue to pay administrative fees that vary by firm.[ii]

Remember to Prepare for Taxes

By investing into annuities, you have the benefit of deferring tax payments. Once you receive income distributions, however, those taxes kick in.[iii] You may have to address other tax liabilities, so be sure to fully research what ones you’ll need to pay. Here are a couple items to be aware of:

·       Ordinary Income Tax: Since annuities receive tax-deferred growth, you owe ordinary income taxes once you receive distribution. In addition, the taxes vary depending on if you choose a lump-sum distribution or ongoing payments. [iv]

·       Early-Withdrawal Tax: The federal government encourages investors to avoid tapping into their annuities funds early. If you need to withdrawal money before the age of 59½, you may have to pay a 10% federal tax on the distribution.[v]

The specific type of annuities you purchased and how much you contributed will drive what taxes and fees you must pay when taking distributions. You will want to develop a plan for these obligations, so you don’t hurt your financial standing once you start receiving income. If you would like to talk through your annuity distribution strategies, we’re happy to help. Please call us at (518) 581-1642.

Footnotes, Disclosures & Sources

1.) http://www.investopedia.com/terms/s/surrenderfee.asp?lgl=myfinance-layout

2.)https://www.fidelity.com/viewpoints/retirement/shoppers-guide-to-annuity-fees

3.)http://www.wealthmanagement.com/retirement-solutions-annuities/tax-advantages-deferred-annuities

4.)http://www.investopedia.com/exam-guide/series-26/variable-contracts/annuity-distributions-charges.asp

5.)http://www.wealthmanagement.com/retirement-solutions-annuities/tax-advantages-deferred-annuities

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