If you have an annuity and are about to retire, you have an important decision to make. You can choose to annuitize your investments, creating a steady stream of income available to you throughout retirement. Or, you can cash out the annuity, and get money into your bank or taxable brokerage account.
The right option for you depends on a couple of variables. Here’s a few things to consider before you cash out an annuity.
Having an amount of fixed income in retirement is important. Fixed income, such as Social Security, a pension, or an annuity provides you with peace of mind that a certain amount of money will hit your bank account each month.
However, having only fixed income in retirement leaves you without a lot of flexibility. You can not ask Social Security or your annuity company to send you more money during a month you want to spend more.
If you determine you need to have more fixed income in retirement, keeping your annuity and converting it into a fixed stream of payments may be a good choice.
However, having more fixed income than you need can leave you with lower growth in your investments. It can also leave you feeling restricted from spending how you may want to in retirement.
If you are comfortable with your sources of income in retirement and need flexibility for increased spending during part of your retirement, cashing out of the annuity may be a good option.
Before cashing out your annuity, you have a few things to consider:
Annuities typically have surrender fees if you cash out the annuity before a certain period of time. Usually these fees are in the first 3-10 years of purchasing your annuity.
Surrender fees are usually a percentage of your investment value, and they usually decline over time. For example, if you purchase a new annuity today, there may be a 7% surrender fee if you cash it out in year 1.
If you wait until year 3, that fee may drop to 4%. If you wait to year 5, it may go away altogether.
Before making your decision on whether to cash out an annuity, check the surrender fees on your policy. You may be able to save by waiting a year or two before selling.
If you take a lump sum out of your annuity, you may face tax consequences.
Any gains that you have received from the investments within your annuity are going to be taxed. Depending on the length of time you have had the annuity and what investments your annuity held, this will vary.
If there are going to be tax consequences for liquidating your annuity, you may want to make sure it makes sense to incur an additional tax bill that year.
If you can wait until your income is low – Perhaps after your retire, or in a year when you don’t make a large IRA withdrawal or do Roth Conversions, it may save you significantly in taxes.
Understanding your annuity may not be easy, but don’t get overwhelmed. We’re here to help you understand your options, and find the best course of action for you and your annuity.
As fee-only, fiduciary financial advisors, our only goal is to help determine the best decision for you. We do not sell you any products or receive any commission from insurance companies.
If you need helping determining what to do with your annuity, schedule a free assessment.