What's an Immediate Annuity?
Oct 4, 2022
Blueprint Income Team
The immediate annuity (sometimes also referred to as a Single Premium Immediate Annuity or SPIA) is a pension-like product you can buy for yourself from an insurance company using your retirement savings. An immediate annuity generates a guaranteed income stream that lasts as long as you do with income starting no more than a year from your purchase. It’s a way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live.
- An immediate annuity is a pension-like income stream you can buy for yourself using pre-tax or post-tax savings
- It creates a retirement paycheck that continues for as long as you live
- Purchased right before retirement, with income starting within 12 months
Let’s talk about the immediate annuity — otherwise known as the Single Premium Immediate Annuity or SPIA. The immediate annuity is a type of income annuity that generates your retirement ‘salary’ — and lasts for as long as you live. You put a portion of your pre-tax or post-tax savings towards purchasing an immediate annuity, and start getting your monthly paycheck within one year. Whether purchased with your retirement or personal savings, an immediate annuity turns your assets into guaranteed income for life. You can think of it like a pension you buy for yourself to start right away (or, at most, within a year). Let’s break it down to understand immediate annuities:
An income annuity is a contract between you and an insurance company. In exchange for a one-time premium, the insurance company promises to give you a steady, guaranteed paycheck for life. The size of the paycheck is specified when you purchase, and depends on factors such as how much premium you paid, your age, and gender.
An immediate income annuity means you’ll start getting payments within a year of paying the premium. (In contrast, longevity annuities don’t begin payments right away, deferring their start for at least two years and as late as 40 years from now.) That’s why immediate annuities can only be funded with a single premium, leaving no room for future contributions.
Qualified immediate annuities are purchased with pre-tax money from your 401(k), traditional IRA, or other qualified plan. The money is transferred penalty and tax-free, but all paychecks you get during retirement will be taxed at ordinary income tax rates.
Non-qualified immediate annuities are purchased with post-tax savings. However, you don’t need to worry about being taxed twice on the money used to purchase an immediate annuity, as only a small portion of each retirement paycheck gets taxed.
The immediate annuity (otherwise known as the Single Premium Immediate Annuity or SPIA) is like a pension you can buy for yourself from an insurance company using your pre-tax or post-tax retirement savings, generating guaranteed income that lasts as long as you do. It’s a great way to diversify your portfolio, and make sure that all, or most, of your basic retirement expenses will be covered for as long as you live.
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Blueprint Income Team
We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.