Filling in the income gap with a single premium immediate annuity

Retirement is a time to relax and enjoy life – especially after many years of hard work and saving. So, the last thing you should have to worry about during this time in your life is running out of income when you still need it. A single premium immediate annuity, or SPIA, can help you to do just that. But before you purchase a single premium immediate annuity, it is recommended that you learn how they work so that you’ll know what you can (and can’t) anticipate going forward.

How Single Premium Immediate Annuities (SPIAs) Work

Just like other types of annuities, a single premium immediate annuity is a contract between you and an insurance company. In this case, in return for a lump sum contribution, the annuity will pay you a set amount of income over a predetermined time frame – such as 10 or 20 years – or even for the remainder of your lifetime, regardless of how long that might be. There are many ways to “customize” a single premium immediate annuity to fit your specific needs. For instance, income payments can be received on a monthly, quarterly, semiannual, or even an annual basis. You can typically also choose whether the income payment from the SPIA will be made to just one individual or two. In this case, for example, you could choose to continue the income from the annuity for the lifetime of two people, such as a husband and wife.

SPIAs and Taxes

It is possible that some – or possibly even all – of the income payments that you receive from a SPIA can be taxed. This will depend upon how the annuity was funded. As an example, if the contribution(s) you make into the SPIA have already been taxed, then only a portion of the income payment will be taxable (the part that is considered the gain), and the rest – the part that represents a return of your original contribution – will be tax-free. However, if your contribution to a SPIA comes from a traditional IRA or employer-sponsored retirement plan – where the contributions were pre-tax, and the gains were tax-deferred – then 100% of the income payment from the SPIA will be taxable to you as ordinary income. This is because none of these funds that you receive have yet been taxed. It is important to understand how your SPIA income payments will be taxed because it can impact the amount of money that you have available to spend on items and services you need to purchase in retirement. Over the past century or so, the top federal income tax rates in the United States have fluctuated a great deal – with a low of just 7% and highs in the 90% range. With that in mind, depending on the future tax rates in the U.S., you may find that a portion of your SPIA income will go to Uncle Sam.

Top Federal Income Tax Rates 1913 – 2020

Year	Rate	Year	Rate
2018-2020	37	1950	84.36
2013-2017	39.6	1948-1949	82.13
2003-2012	35	1946-1947	86.45
2002	38.6	1944-1945	94
2001	39.1	1942-1943	88
1993-2000	39.6	1941	81
1991-1992	31	1940	81.1
1988-1990	28	1936-1939	79
1987	38.5	1932-1935	63
1982-1986	50	1930-1931	25
1981	69.125	1929	24
1971-1980	70	1925-1928	25
1970	71.75	1924	46
1969	77	1923	43.5
1968	75.25	1922	58
1965-1967	70	1919-1921	73
1964	77	1918	77
1954-1963	91	1917	67
1952-1953	92	1916	15
1951	91	1913-1915	7

Source: Inside Gov (http://federal-tax-rates.insidegov.com/)

How to Purchase a Single Premium Immediate Annuity

While there are many advantages to owning a single premium immediate annuity, these financial vehicles are not right for everyone. So, if you’d like to learn more about how a SPIA may – or may not – be a good fit for your retirement income needs, it is recommended that you first talk with an annuity specialist. Doing so can allow you to ask questions and gather additional information, and in turn, be able to anticipate how this type of annuity works. At Annuity Gator, we make learning about all kinds of annuities easy. In fact, it is our mission to educate consumers and financial professionals regarding the ins and outs of “all things annuity.” So, if you’d like to reach out to us, please call directly at (888) 440-2468, or feel free to send us an email with any questions that you may have. We look forward to assisting you.