While a fixed annuity can be a great way to ensure you receive guaranteed income in retirement, there are a couple of factors to keep in mind if you want to maximize your returns. One is that withdrawing from your annuity before the age of 59.5 will result in a 10% early withdrawal penalty issued by the IRS. Another is that you could be cutting your growth potential short by withdrawing funds before you need them. You do have other options at your disposal, so let’s examine the main paths you can take once your fixed annuity has ended.
How Does a Fixed Annuity Work?
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Fixed annuities work by growing the money that you contribute. When you purchase a fixed annuity, you must decide on its term, or the length of the contract, which typically ranges from one to 10 years. You also determine the contribution amount, which is the sum of money you will provide to fund the account. With those points settled, the annuity provider will offer you an interest rate at which your money will grow. The rate is fixed, so it will not fluctuate during the life of your contract unless you agree to renegotiate conditions.
Then you start funding your account. You can do so with either a lump-sum contribution or a series of contributions over time. What follows is the accumulation phase, in which your money grows tax-deferred at the fixed rate agreed upon at the time of purchase. From there, it’s a matter of waiting until your term ends, at which point you must make a decision about your annuity contract.
What Can You Do With a Fixed Annuity After It Ends?
At the end of your annuity term, you can make one of the following four choices:
Roll Over
You can expect your annuity provider to get in touch with you when your annuity term is nearing its end. When they do, they might offer you a new fixed rate if you decide to keep your money with the company and roll it over into a new annuity contract. From that point, you might have a set amount of time to make your decision.
Rolling over your fixed annuity may be a wise choice if you haven’t reached the 59.5-year-old threshold or you wish to grow your money a little more before making withdrawals. Keep in mind, though, that your provider’s newly offered interest rate may be lower than the previous one. It’s up to you to decide whether the new rate will satisfy your financial goals.
Transfer It
Transferring is the practice of moving your money to another to a different annuity provider or a different type of annuity. Transferring to a different provider may be a good move if the new provider offers you a better interest rate while rolling over to a different annuity type may help you grow your money faster.
A variable annuity, for example, offers a fluctuating rate based on market performance, so you stand to realize a greater upside during market upturns. One of the chief upsides of transferring is that there are no taxes due as long as you move your money from one annuity to another.
Annuitize
Annuitizing an annuity means converting the contract into a series of cash distributions. You can choose to receive distributions for the rest of your life or specify that you’d like your distributions spread out across a certain period; the amount of your regular distributions will depend on the choice you make.
Annuitization is best suited to those who have reached the minimum age threshold and have grown their money enough to meet their retirement needs. If you don’t meet those criteria, you could cut into your returns with tax penalty payments or cut your growth potential short. It’s important to note that once you begin receiving distributions, the interest you’ve gained on your account is taxable as income.
Cash Out
Cashing out means taking out all of your money in one go. This would be a good option if you need a large sum of money immediately or you’re just not sure what you want to do with the money. There’s some versatility to cashing out, as you could use the money to make investments or put it toward another retirement vehicle (including another annuity) down the line.
Understanding your objectives and your current financial situation is essential for making the best choice at the end of your fixed annuity term. If possible, work with a financial adviser to figure out what more you need to do to hit your savings goal. If you have a ways to go, then you may want to roll over or transfer your funds. Otherwise, you can begin taking advantage of the gains you’ve realized.
