Deferred Annuities Might Be in Several "Flavors:" - Liquid i.e. "unencumbered" (no penalty or surrender charge for moving lor liquidating) is critical for the info described)
Simply put, there might have been a Surrender Charge, Withdrawal Penalty or other cost to the owner to get out of the contract when it was purchased. At some point those charges or penalties potentially go to zero - so - "unencumbered" in the examples below.
Potential 1035 Tax-free Exchange possible but potential tax due is also possible so consult Your Tax & Investment Professionals
If, oversimplified, you own a stock inside a traditional IRA, you can sell that stock in the IRA, buy another one, and not pay any tax at the time of the transaction because you didn't withdraw out of the IRA. Similarly if your Deferred Annuity is inside a Traditional IRA and you make a change into something else that is still inside your Traditional IRA, no tax at the time of the change. (Withdrawals leaving IRA would be subject to normal tax rules.)
If you have gain inside a NQ - Non-Qualified Deferred Annuity and do not make a 1035 tax-free exchange, you potentially will have to pay tax at the time of the change transaction. Again this varies so consult pros.
1. & 2. Guaranteed Lifetime (or Joint) Income you can't outlive using a SPIA - "Life Annuity" - potentially w health care expense protection
Unlike an (e.g.) IRA, or even potentially your existing Deferred Annuity, after the "less healthy" spouse dies, a Joint Life Annuity continues guaranteed payment for the lifetime of the second spouse.
Do NOT do this without consulting knowledgeable & experienced professionals!
- SPIA potentially provides:
A. Can not "run out of money."
B. Income guaranteed by carrier both lifetimes.
C. No stock market risk.
D. Typically fixed payment unless you choose the COLA option, which probably would start lower but grow over time.
- If you have a Deferred Annuity with no income benefit or death benefit, the moving parts are fewer and potentially easier to understand your Fiduciary Best Interests.
- If your Deferred Annuity has a Guaranteed (joint) Lifetime Withdrawal Benefit, depending on the specifics, this income could be lower or higher - potentially substantially higher, than a possible SPIA. Or lower.
- But .... this withdrawal benefit has potential capital value. This capital value could be "demanded" for health or Long-Term care purposes. The SPIA has zero capital value. So the only thing that could be "demanded" would be the income payment while the less healthy spouse is alive.
- Upon the death of the less healthy spouse using the SPIA with Joint Life Income example, the guaranteed payment continues for that spouse's lifetime.
3. Reduce RMDs - Required Minimum Distributions you don't need for living expenses with a QLAC - "Qualified Longevity Annuity Contract"
A QLAC - "Qualified Longevity Annuity Contract" - can, within limits, enable you to reduce the amount of RMDs - Required Minimum Distributions - you must pay each year based on your age and tax requirements.
4. Fund a future tax-free benefit for grandchildren - no income tax or capital gains tax. Establish separate Roth IRA with grandchildren as beneficiaries. Might be a good place for growth investments.
Using applicable Federal Tax guidelines, if you qualify, you may establish a Roth IRA funded by cash / check / EFT. (No securities.) You determine who you wish as beneficiaries. Funding with after tax dollars. Unlike Traditional IRA, you are not required to make any withdrawals. At your death, the Roth IRA balance goes to beneficiaries. There is no federal income tax or capital gains tax at your death. There is no federal income tax or capital gains tax upon withdrawal. So investments made inside the Roth continue to grow and / or generate tax-free income as long as they are inside the Roth IRA.
5. Avoid "wasting" premium for Long Term Care insurance you might never need by using a "Hybrid" combining Deferred Annuity with LTCi
If you prefer not to put money "down the rathole" for a Long Term Care insurance policy you might never need. Hybrid policies available from several carriers are combined with a deferred annuity. The money in the deferred annuity is yours and any remaining would go to beneficiaries at death. If a covered person did need Long Term Care, some or all of the money could be used for that purpose. So the money is never "wasted."
6. Fund a tax-free benefit - using a Life Insurance Trust for children & grandchildren with lump sum & / or periodic payments from Deferred Annuity. Also protected from Creditors Predators Divorce and Stock Market Risk.
If you are in a financial position to gift to future generations and can medically qualify for life insurance, you can potentially enlarge the value of the benefit your children / grandchildren receive. (i.e. the Death Benefit) You can make annual withdrawals out of an existing Deferred Annuity. (Check with tax professional on taxability of the withdrawal.) Once gifted into a Life Insurance Trust, no income tax or capital gains tax on Death Benefit. And the combination of the Life Insurance and the Trust could offer children & grandchildren some protection from Creditors, Predators, Divorce and even potential Mismanagement by using an outside Fiduciary Trustee. Consult all your tax, financial AND legal professionals.
7. Protect inheritance for children & grandchildren from Creditors Predators Divorce and / or Mismanagement. Transfer Lump Sum, or periodic payments into Irrevocable Trust or make the trust the beneficiary of the Deferred Annuity
Using any workable combination of periodic gifts, lump sum gifts and / or making the Trust the Beneficiary can potentially give you all the protections noted above. Unlike the life insurance, this action would not provide tax-free benefits. But the other protections would still occur. Again, consult all your tax, financial AND legal professionals.
8. Potentially Improve or add Death Benefit with a different Deferred Annuity
If your Deferred Annuity does not have a Death Benefit but you want one, if it is a liquid (unencumbered) Deferred (and Non-Qualified) Annuity, you might be able to do a 1035 Tax-Free Exchange to a different Deferred Annuity with a Death Benefit better suiting your current needs.
8. Potentially Improve or add Guaranteed (joint) Lifetime Income Benefit with a different Deferred Annuity
If your Deferred Annuity does not have an Guaranteed (joint) Lifetime Income Benefit ... and if your Deferred Annuity is liquid (unencumbered) you might be able to do a 1035 Tax-Free Exchange (Non-Qualified) or Custodian-to-Custodian IRA "Transfer" to a different Deferred Annuity with an income benefit better suiting your current needs.
10. Begin guaranteed (joint) lifetime "income" ("withdrawal benefit) from your current Deferred Annuity
If your Deferred Annuity has a good Guaranteed (joint) lifetime income benefit, it might be best to begin taking it "now" (ish) or soon. Consult financial professional, but it could work out well. At least "do the math."
Disclosure and Possible Warning:
At the time of this writing these things were potentially as described. Financial facts change over time. e.g. interest rates. Financial situations change over time. Tax rules and laws definitely change over time. Consult appropriate professionals.
If you are purchasing an annuity to fund any tax-qualified retirement plan (IRA), you should be aware that this tax-deferral feature is available with any investment vehicle and is not unique to an annuity. Carefully consider the features and benefits of the annuity before making the decision to purchase.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 ½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account values will fluctuate with changes in market conditions.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.