An immediate annuity refers to an annuity contract that is designed to provide a stream of income almost immediately after the investment is made. Here’s how it typically works in the context of IRAs:
- Purchase: An individual uses a portion of their IRA funds to purchase an immediate annuity from an insurance company. This is often done at retirement or when a steady income stream is needed.
- Lump Sum Investment: The purchase involves a single lump-sum payment. The amount invested depends on the individual’s retirement savings and their income needs.
- Immediate Income Stream: Unlike deferred annuities that start payments at a future date, immediate annuities begin paying out within a short period after purchase, often within a year and sometimes as soon as a month.
- Income Duration: The income can be set up to last for a certain period (like 10 or 20 years), for the lifetime of the individual, or even for the joint lifetimes of the individual and a spouse.
- Tax Implications: Since the funds used to purchase the annuity come from an IRA, which is a tax-deferred account, the payments received from the immediate annuity are subject to income tax.
- Security and Predictability: These annuities provide a guaranteed income, offering financial security and predictability in retirement. However, the trade-off is that once the annuity is purchased, the individual generally cannot access the lump sum invested, except through regular payments.
- Variations and Options: Some various options and riders can be attached to immediate annuities, like inflation adjustments or death benefits, which can affect the amount of income and the cost of the annuity.
Immediate annuities are a popular choice for retirees looking for a reliable income stream, as part of a broader retirement strategy that might also involve other IRA investments and social security benefits. It’s important for individuals to carefully consider their overall retirement needs and consult with financial advisors before purchasing an immediate annuity.