THE PROS AND CONS OF ANNUITIZING
For owners of annuities, an important question arises when they want to begin drawing income from the annuity:
should they annuitize their payouts? The choice is important because often you can’t change your mind once
payouts begin. Here’s a look at the pros and cons, and how annuity companies are beginning to offer more
flexibility in their contracts regarding payouts.
Annuitizing a fixed annuity means you convert the pool of money you’ve accumulated in your contract into a
stream of income, which typically is paid to you monthly. Let’s assume you’ve held a deferred annuity long enough
so you won’t face any contract surrender issues or early withdrawal charges (before age 59 1/2). The
advantages of annuitizing include:
Not outliving your money. One of the major attractions of annuities is the option to choose guaranteed
payments for a specified period of time, including lifetime. People wanting regular income or worried about
outliving their retirement funds find this feature especially attractive.
Getting a tax advantage. With annuitized payments from nonqualified annuities (whose premiums are not tax
deductible), part of the payment is considered a return of principal for which you’ve already been taxed, so you
pay taxes only on the earnings portion. Non-annuitized payments are considered first a return of earnings, so
taxes are assessed up front on the entire payment until all earnings are withdrawn.
If you don’t annuitize, you can take your money out in a single lump sum or in multiple withdrawals, or you can
leave the money in the policy and let it continue to grow. The advantages of not annuitizing are:
Flexibility. You can withdraw money as you need it. Well-off retirees may find they don’t need regular payments
and can leave the accumulated funds to their heirs. With some annuities, you have the option of making
systematic withdrawals if you want the benefit of a certain payment amount each month, but with the flexibility of
changing that amount. On the other hand, annuit