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Single Premium Immediate Annuities
Annuities are purchased by individuals so that the individual or annuitant can receive guaranteed income from the annuity over a specified period of time. Annuities can be thought of as loans in reverse with the individual purchasing a contract with a company that then pays back the sum of money plus interest in specified amounts over a specified period of time. Some annuities will pay out over the remainder of the annuitant’s life even though the original sum has already been paid back.
Immediate annuities are annuities that begin payments to the annuitant immediately after the annuity has been purchased. This usually means the first payments back to the annuitant happen 30 days after the annuity has been purchased. Immediate annuities paid for with one lump sum of money are considered single premium immediate annuities.
Payment amounts and frequency of payments from a single premium immediate annuity depend on the sum of money paid into the annuity. If the sum of money was large, then the payments received from the annuity will be larger than payments made from an annuity purchased with a smaller sum of money. Also, if the annuitant purchases a single premium immediate annuity with lifetime payout and forfeits the rights to withdraw or refund premiums, then the annuitant continues to be paid from the annuity even after the initial premium has been repaid.
Examples of Funding
Some examples on funding single premium immediate annuities are:
- Sale of house or estate
- Sale of mutual funds or investments
- Proceeds from life insurance
Examples of Qualified or Tax Deferred Funding
If a single premium immediate annuity is purchased from a tax-deferred retirement account then the annuity can be considered a qualified annuity. Annuities purchased with tax-exempt or deferred accounts have monies that are taxed when the annuitant receives payments. Examples of qualified or tax-deferred funding for single premium immediate annuities are:
- Employer pension funds or SEP (simplified employee pension)
- 401(k) plans
- 403(b) plans
- Keogh plan
- Defined Benefit or Defined Contribution Plan
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