Annuities help ensure that you do not outlive your income. They are classified in various ways, including the number of lives covered, the time benefits begin, the method of purchase and the tax treatment. A single-premium deferred annuity is classified based on when the benefits begin and the method of purchase.
Function
Single-premium deferred annuities are designed to allow you to contribute a lump sum into an investment account and receive a steady income at a later date, usually when you retire. Single-premium deferred annuities have two phases: the savings phase, in which your contributions and interest grow tax-deferred, and the income phase, in which you receive distributions.
Funding
You can fund your single-premium deferred annuity in several ways. Because it is a lump-sum contribution, people generally use the proceeds from the sale of a house or other real estate, money inherited from a loved one or money received from cashing out or rolling over a retirement account. No payments are made after the initial payment.
Types
Investors have three types of single-premium deferred annuities to choose from: fixed, variable and indexed. Fixed single-premium annuities are for conservative investors. They offer a guaranteed fixed interest rate for a certain number of years, and your principal is fully protected. Variable single-premium annuities are more aggressive than fixed single-premium annuities. Their interest rate is dependent upon investment market rates; neither the principal nor the interest is guaranteed. Indexed single-premium annuities are a combination of fixed and variable. While the principal investment is guaranteed, the interest is tied to the current investment market rate. Indexed single-premium annuities often are recommended for those who don't want to lose their initial investments but who are willing to wager a little with the interest.
Tax Implications
Withdrawals from a single-premium deferred annuity are made on a last-in, first-out basis, meaning the interest is withdrawn first and subject to regular income taxation. If you choose to withdraw funds before age 59 1/2, you may also be subject to a 10 percent early withdrawal penalty.
Considerations
Single-premium deferred annuities do not allow you to make multiple contributions and must be purchased from an agent who has a valid life insurance license. If you're purchasing a variable single-premium deferred annuity or an indexed single-premium deferred annuity after Jan. 12, 2011, the agent must have a valid life insurance license and be registered with the Financial Industry Regulatory Authority.
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