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You can create a financial strategy that evolves with you. Start by establishing goals for your future, such as your ideal retirement age, your ability to provide financially for children or other loved ones, and your standard of living.

Minimizing Taxes Using Annuities and Retirement Accounts

Taxes are a part of life, but if you’re financially savvy, you can pacify Uncle Sam while keeping a greater percentage of your hard-earned money.

Financial products and savings vehicles such as 401(k) plans and IRAs, CDs and annuities allow you to legally defer or minimize your tax burden.

Annuity Strategies for Tax Deferral & RMD Requirements

When it comes to tax-preferred retirement accounts, the law can be unyielding in certain respects. For example, if you have a traditional IRA or 401(k), the IRS requires you to make withdrawals of certain minimum amounts when you turn 72 and every year after that. Those withdrawals are called required minimum distributions, or RMDs.

RMDs can have tax implications that some retirees want to avoid, especially if they don’t need to spend the money when the withdrawals are required. And nonqualified annuities can help to mitigate this requirement.

If you want to leave your savings to a beneficiary, you can get a fixed annuity with a guaranteed death benefit rider. That way, you can take your RMDs as annuity payments, leaving the principal intact.

You can also use the money you’re required to withdraw to purchase a flexible premium fixed annuity. With a flexible premium annuity, every premium payment adds to the annuity’s value, and the annuity will continue to grow tax deferred.

This is not a way to avoid the immediate tax implications of the RMD, but it will help you make the money last longer.

Qualified Longevity Annuity Contracts (QLACs)

A qualified longevity annuity contract (QLAC) is a deferred annuity purchased inside a qualified retirement account. Under the law, a QLAC can account for 25 percent of the retirement account’s total balance up to $125,000.

The value of the annuity is exempt from required minimum distributions, which means an annuity strategy that includes a QLAC can reduce your RMDs by as much as 25 percent.

You are not required to take distributions from a QLAC until the age of 85. This allows the money to accumulate over a longer period of time, which leads to greater income-benefit payments from the annuity.

Employer-Sponsored Retirement Plans

It’s common knowledge that contributing the maximum amount to your employer-sponsored 401(k) plan is one of the most effective means of saving for retirement.

Your pre-tax contributions lower your taxable income and allow your money to earn interest on a tax-deferred basis. Additionally, many employers offer a contribution match that boosts your retirement savings.

Individual Retirement Accounts

Likewise, both traditional and Roth IRAs are tax-favored savings accounts that guarantee income during retirement.

You can avoid the income and contribution limits on these accounts by diversifying your assets to get the highest tax savings.

Maximize Your Annuity Income Benefits

Annuities are one of the most effective ways to generate guaranteed income for life.

You can maximize your annuity benefits using one of several annuity strategies. For example, you can delay taking payments from a life annuity for as long as possible. This strategy results in higher income payments.

If you start taking payouts as soon as you’re able, at age 59 and a half, the monthly payments will be much lower than if you wait until age 75. This rule of thumb is really just common sense. The more payments you receive, the lower each payment will be. Therefore, if you start taking payments when you’re older, you’ll be closer to the end of your life, which means you will receive fewer and larger payments.

The catch here is that you don’t know how long you’re going to live. If you wait too long, you may not get any benefit at all from your annuity. But if you’re relatively healthy and come from a family where people tend to live longer, the best strategy is to delay receiving annuity payments as long as you’re comfortable waiting. This strategy is similar to deciding when to claim Social Security benefits.

Another broad strategy you should keep in mind with buying annuities is to keep things simple. The more riders you buy and the more complex your annuity is, the more expensive it will be and the lower your payments will be.

Interested in Buying an Annuity?
Learn about the different types of annuities and find out which one is right for you.

Laddering Strategies Using Multiple Annuities

Annuity laddering is an annuity strategy that involves purchasing multiple annuities to get the best of changing market conditions.

The goal of annuity laddering is to maximize your return by dividing your principal among a variety of annuities at different times. This allows you to take advantage of changing interest rates without missing opportunities under the current market conditions.

For example, if you have $400,000 to spend on annuities, buy an annuity for $100,000 in each of four consecutive years. Or you can buy several annuities with different surrender periods. As each surrender period ends, you can evaluate whether to keep your money in the same annuity or withdraw it and buy a new one with better features.

You can also buy multiple deferred annuities that start paying out at different times, allowing more growth for the contracts with longer accumulation phases.

Charitable Gift Annuity Income Strategy

Charitable gift annuities offer donors and charities a win-win situation. They allow donors to transfer assets to a charitable organization in return for regular payments for the donor’s lifetime.

The donation is tax deductible, and the charity receives a gift equivalent to half of the funds contributed to the annuity.

According to the American Council on Gift Annuities, thousands of organizations, from the American Heart Association to Youth for Christ Foundation, offer charitable annuities as part of their fundraising efforts.

Annuities as Part of a Diverse Portfolio

Annuities can provide a hedge against the volatility of the stock market. Including an annuity as part of your overall financial plan can give you some security as you plan for capital growth through equity investments.

Keep in mind that annuities are not investment products. Fixed annuities are insurance products that share characteristics with more conservative financial instruments, such as CDs. Most financial professionals advise a balanced portfolio that becomes more conservative the closer you get to retirement. Diversification is a strategy in which you allocate your assets according to your financial goals, and annuities certainly have a place in such a strategy.

Early Retirement Strategies

If you plan to retire early, now is the time to speak with a financial advisor about implementing an airtight financial strategy.

A movement known as FIRE — or Financial Independence, Retire Early — has gained traction recently. The strategy emphasizes aggressive saving and extreme discipline with expenses. Annuities are well-suited for a retirement plan that relies on such austere spending habits.

Once you’ve set your goals for early retirement, put your plan into action immediately. In addition to saving as much as you possibly can while still attending to your basic needs, take measures to optimize every dollar you spend.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 17, 2020

5 Cited Research Articles

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  1. American Council on Gift Annuities. (n.d.). Members (Full Listing). Retrieved from https://www.acga-web.org/public-resources/resource-member-organization
  2. Collinson, C., Rowey, P. & Cho, H. (2018, December). A Precarious Existence: How Today’s Retirees Are Financially Faring in Retirement. Retrieved from https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf
  3. Erb, K.P. (2017, August 3). 7 Tax Favored Strategies To Plan For Retirement Now. Retrieved from https://www.forbes.com/sites/kellyphillipserb/2017/08/03/7-tax-favored-strategies-to-plan-for-retirement-now/
  4. Hayes, A. (2016, August 3). 4 Ways to Create a Passive Income in Retirement. Retrieved from https://finance.yahoo.com/news/4-ways-create-passive-income-144500941.html
  5. Loudenback, T. (2019, November 13). How to retire early so you can work, travel, and relax on your own schedule. Retrieved from https://www.businessinsider.com/personal-finance/how-to-retire-early-steps-for-early-retirement