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What is annuitization?

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Anonymous

12y ago
Updated: 1/6/2023

An annuitant is the recipient of an annuity.

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Eleazar Sanford

Lvl 10
2y ago

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What are common modal annuitization options?

monthly, quarterly or annually.


A cash management tool used to plan the timing and amount of cash disbursements is referred to as to as which of the following?

annuitization


What exactly is this 'annuity' I keep hearing about and should I get one?

Annuity is a financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years. There are a lot of good and bad features of annuities. First of all there are tremendous tax benefits for investing in annuities. Specifically the money you invest in an annuity grows tax deferred until you eventually start your withdrawals.


Does withdrawing too much under a IRS rule 72t plan invalidate the plan?

That would depend on what you mean by "withdrawing too much". If you mean that you withdraw so much during the plan period (the longer of 5 years or until you reach age 59 1/2) that you run out of funds then the answer is no. According to the IRS website:"If an individual's assets in an individual account plan or an IRA are depleted, the individual will not be subject to the income tax of section 72(t)(1) of the Code as a result of not receiving substantially equal periodic payments. In addition, the recapture tax described in section 72(t)(4) of the Code will not be applicable." If you mean that you withdraw more than allowed (using one of the 3 approved withdrawl methods: Minimum Distribution, Fixed Amortization or Fixed Annuitization) under the 72(t) rule then yes you will be subject to the 10% penalty and may be subject to the recapture tax specified in 72(t)(4).


What is the tax treatment of a non qualified annuity?

Please clarify what country you are talking about. Different countries have different tax laws. Taxation rules for a nonqualified annuity owned by individuals subject to United States tax jurisdiction are contained in Internal Revenue Service Publication 17. A nonqualified annuity is funded with after tax dollars and accordingly the tax basis for all contributions is zero. Any contract gains made above the tax basis are generally taxed at ordinary income tax rates. The primary advantage of a nonqualified annuity is the benefit of allowing savings to grow on a tax deferred basis. In an ordinary savings or stock account all realized capital gains, dividends, and interest are taxed on a yearly basis. In a nonqualfied annuity account gains can compound tax free over time until funds are withdrawn. Different tax rules apply depending on whether the annuity holder takes a withdrawal or an annuitization payment. When a withdrawal is made from a nonqualified annuity gains are considered to be distributed first and will be fully taxable. For example, an individual holding a nonqualified annuity with an account balance of $200,000 consisting of $150,000 of after tax contributions and $50,000 in gains would owe ordinary income tax on $50,000 of a $70,000 withdrawal. The remaining $20,000 would be tax free since it represents part of the cost basis comprised of after tax contributions. When an owner of a nonqualfied annuity chooses to receive annuity payments each year part of the payment will be comprised of a tax-free return of his basis and part taxable gain. The rules can become very complex and exceptions to the general rule cited above exist for contracts issued prior to August 14, 1982. In addition to possible taxation of withdrawals a penalty tax of 10% is assessed on money withdrawn before the age of 59 1/2. If the account owner dies with gains in the nonqualified annuity the beneficiary will inherit the tax basis of the decedent and owe ordinary income taxes on the distribution of any gains.


Understanding Types Of Fixed Annuity Payouts?

Insurance companies issue fixed annuities as a form of guaranteed income. These types of payments are recommended for individuals who are or plan to retire. Guaranteed income despite the changing of investments is especially important for their financial future. There are several different types of fixed annuity payouts; this article will discuss the different types. Annuities provide a solution especially for retired individuals who want a steady dependable income.Life OnlyThis type of payout guarantees the annuitant a fixed monthly payment amount for the rest of their life. Only upon the annuitant's death will the payments stop. Life-only payments typically generate the most income from the smallest capital amount. Most holders of these policies find them to be their best investments.Life With Period-Certain PayoutsThese payouts have a smaller payout than the life-only option. The most beneficial aspect of these payments is that if the annuitant dies during a specific number of years, the remaining benefits are given to a named beneficiary.Period OnlyAnnuities falling in this category only yield payouts for a specific time period, not for the entirety of the annuitant's life. Along with paying benefits for a specific number of years, these annuities also pay a death benefit to a beneficiary if the annuitant dies before the period is over. If the annuitant survives the time period's lapse, the contract is complete and benefits are exhausted.Joint And SurvivorJoint and survivor payouts are given for the remaining lifespan of two annuitants. When making plans for the future, couples often choose this option because it leaves provisions for the surviving spouse. Without such a designation, benefits would expire at or shortly after the death of the sole holder.Interest IncomeSome fixed annuities are similar to certificates of deposit, or CDs, which are provided by banks. CDs pay a specific rate of interest for a specific time amount; interest income annuity payouts work the same way. While this is not the ideal choice for every person, there are benefits of choosing this type of payout for some individuals. Benefits of interest income payouts include tax deferral and annuitization, among several other less significant features.


Can you withdraw money from an 401k before retirement age?

Yes but not without paying the 10% early withdrawal penalty on the taxable amount of the distributions unless you meet one of the exception to the early withdrawal penalty.The taxable amount of your distributions will always be subject to income tax at your marginal tax rate.One way to this without paying the 10% early withdrawal penalty is by using the section 72t (SEPP) substantially equal periodic payments. Once you choose to start this distribution method you will have to make sure and follow the rules for the period of time that is required or you will be subject to the 10% early withdrawal penalty on all of the taxable distribution amounts for not meeting the time period rules.All of the taxable distribution amount that you receive each year will be added to all of your other gross worldwide income and taxed at your marginal tax rate.For more information about the treatment of retirement plan distributions go to the IRS.gov web site and use the search box for Publication 575, Pension and Annuity Income.One of the exception rules to the 10% early withdrawal penalty is enclosed below and you can also find the other information in the referenced Publication.Tax on Early DistributionsGeneral exceptionsThe tax does not apply to distributions that are:Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service). See substantially equal periodic payments, later.Substantially equal periodic payments. Payments are substantially equal periodic payments if they are made in accordance with one of the following methods.Required minimum distribution method. Under this method, the resulting annual payment is redetermined for each year.Fixed amortization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.Fixed annuitization method. Under this method, the resulting annual payment is determined once for the first distribution year and remains the same amount for each succeeding year.For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 atClick on the below Related Links


What are annuities?

There can be a few different definitions but in short as it applies to insurance or financial services: = Two Main Annuity Types: Immediate and Deferred = The difference between deferred and immediate annuities is just about what you'd think. With an Immediate Annuity your income payments start right away (technically, anytime within 12 months of purchase). You choose whether you want income guaranteed for a specific number of years or for your lifetime. The insurance company calculates the amount of each income payment based on your purchase amount and your life expectancy. A deferred annuity has two phases: the accumulation phase, where you let your money grow for a while, and the payout phase. During accumulation, your money grows tax-deferred until you take it out, either as a lump sum or as a series of payments. You decide when to take income from your annuity and therefore, when to pay the taxes. Gaining increased control over your taxes is one of the key benefits of annuities. The payout phase begins when you decide to take income from your annuity. For most people, this is during retirement. As your needs dictate, you can take partial withdrawals, completely cash-out (surrender) your annuity, or convert your deferred annuity into a stream of income payments (annuitization). This last option is essentially the same as buying an immediate annuity.