Senior Finances 101: Understanding Annuities, #2

Oct 7th, 2010 | By Sharon Shaw Elrod MSW EdD | Category: Senior Moments Blog

The first plan we are going to talk about in the SCJ series on annuities is the Single Premium Deferred Annuity.  The SPDA is self-explanatory–you deposit a sum of money (single premium) in the policy and then wait until a later time (deferred) to withdraw the money.  You and the insurance company agree in a contract (the annuity agreement) that you are guaranteed a certain rate of interest for a defined time period.  The time period can be anywhere from one to seven years.  Your interest rate will depend on the length of the guarantee.  As in any annuity, if you take money out before the agreement stipulates, you will be hit with surrender charges. 

The attractive feature of the SPDA is the tax issue; you do not pay tax until you withdraw money, not even when the interest begins to add up in the policy.  If you have money to invest, and are as sure as you can be that you won’t need it for a long period of time, and want the money safely producing interest income, a SPDA is a good option to consider because you can watch the interest grow

without paying any tax on it.  Of course, years later when you begin to withdraw funds, or your beneficiary does, tax will be paid on the interest.

If you are in a comfortable place financially, do not need any more money to live on and come up with a sum of money that you need to invest, you may want to look at an SPDA.  Particularly if you think you may want the money later in life, or want to make it available to a son or daughter or grandchild.  An example might be when a CD or bond matures.  You can reinvest the money in another CD or bond paying 5-6% interest, receive regular interest on the investment, and pay tax on the interest as it accumulates.  Or you can consider a SPDA paying 5-6% interest, allow the interest to accumulate tax-free, and pay tax on the interest only when the money is withdrawn.

As always, you need to talk with your financial advisor about SPDAs before you make any decisions.  Tomorrow we look at the Single Premium Immediate Annuity, and the differences between it and the SPDA.



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