Knowing how your annuity income payments are calculated is one of the most important determinants of your overall cash flow in the future. While you may qualify for Social Security benefits and/or an employer-sponsored pension, the income you receive from an annuity can oftentimes fill in a shortfall between income and outgo. These funds could also help you to bridge the gap between leaving your employer and retiring “early,” and the time you can start collecting other income benefits.
What Determines the Amount of an Annuity Income Payment?
There are several factors that determine the amount of income you will receive from an annuity. These can include:
- How long you want the income from the annuity to last
- The amount of money you have in the annuity contract
- When you want your annuity payments to begin
- Your gender and date of birth
- Your state of residence
Annuities will typically offer several different options for how long the income will last. These alternatives may include a set period of time, such as ten years or twenty years, or for the remainder of your lifetime (which, in some cases, could far surpass any of the pre-set time frames).
In this instance, the longer you want the income stretched out, the lower the dollar amount of each payment will be. This is because a longer time period of making annuity payments exposes the insurance company to more risk.
The amount of money that is in the annuity contract can also be a key criterion in the amount of your payments. A smaller contract value can reduce the amount of each payment, if all other factors are equal.
Starting your annuity income payments right away can equate to a lesser amount of each “paycheck” you receive. This is because, due to your younger age at the time these payments begin, the insurance company may be required to make payments for a longer period of time. Just the opposite is true, though, because waiting longer to start the income payouts can result in a higher dollar figure of each.
Your date of birth and gender are also key components of the payment amount from an annuity. In this case, men – on average – have a shorter life span than women. Therefore, if all of the other factors are the same, males will typically receive higher payments than females. Generally, your state of residence is also considered when determining the amount of your annuity income payments.
How are Annuity Income Payments Taxed?
In addition to knowing the amount of your annuity income payments, it is also essential to understand how much – if any – of these payouts will be taxed. That is because the more you owe in taxes, the less you will have available to spend on the items and services you want and need during retirement.
The best way to determine how much of each annuity payment is taxable is to take a look at whether the annuity is qualified or non-qualified. For instance, qualified annuities are funded with money that has not yet been subject to any taxation. These funds can include money from a traditional IRA and/or 401(k) plan, where contributions went in pre-tax.
Because the contributions have not been subject to taxes yet – nor has the tax-deferred gain that is inside of the account – 100% of the income payments will be considered as taxable income.
Alternatively, a non-qualified annuity is one that is funded with after-tax dollars. As an example, if you have money in a personal savings or investment account, you have likely paid tax on the money you contributed.
In a non-qualified annuity, the money in the contract grows tax-deferred. Therefore, because your contributions have been subject to tax, but the gains have not, the gains will be taxed as ordinary income when accessed, and the money that’s considered a return of your original contribution will be tax-free. The percentage of your annuity income that is not subject to tax is called the exclusion ratio.
Does an Annuity Make Sense for You?
Annuities are flexible financial vehicles that can provide you with lifetime income, as well as tax-advantaged growth. But even with these nice features, an annuity may not necessarily be right for you.
If you would like to learn more about which annuity – if any – could fit in with your financial objectives, just give Annuity Gator a call and talk with an annuity specialist. We can be reached by phone at (888) 440-2468, or by sending us an email through our secure online contact form.