Lump Sum Vs. Annuity for Retirement Distributions
Annuities are insurance products designed to help you save money for retirement. However, some people never use their annuity benefits up before they die. If you inherited an annuity that was never used for retirement purposes, you have a few choices as to how you can receive the proceeds. Make sure you understand these options.
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Process
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There are two ways you can take your inherited annuity. The first way is a lump sum distribution. The lump sum distribution is when you take all of the annuity proceeds at once. The other way you can take your annuity distribution is by annuity payments. Annuity payments spread out the annuity amount over a set number of years or for your lifetime.
Significance
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The significance of taking a lump sum distribution is that the lump sum distribution does not keep the annuity savings on deposit with the insurer. You must invest the annuity savings yourself and manage the investment yourself. The significance of taking monthly annuity payments is that you leave the annuity savings with the insurance company, and they manage the investments for you. They also portion the money out to you so that you don't spend down the annuity savings too quickly and can rely on it as a source of income.
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Benefits
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The benefit of taking a lump sum distribution is that you gain maximum control over the annuity savings and flexibility in terms of how that savings is invested. The benefit of annuity payments is that you avoid running out of money if you are depending on the inherited annuity for income.
Disadvantages
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The disadvantage to taking a lump sum distribution is that you pay taxes on all of the gains in the annuity contract at once. This could amount to such a substantial amount that it pushes you into a higher tax bracket causing the total amount of taxes you pay on all income to increase in the year you receive your lump sum distribution.
Considerations
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Before you decide which payment option to take, keep in mind that you need to define a purpose for the savings. Think about whether you need income or if you need lump sum savings; this will determine what distribution you should take.
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