Opening an Annuity at 70
Confusion often exists about what annuities are suitable for whom and under what circumstances. Some confusion centers around qualified vs. non-qualified annuities. Qualified annuities allow tax-deductible contributions with deferral on all money. Qualified annuities include IRA, 401k and 403b accounts. Non-qualified annuities supplement retirement savings in accounts where only earnings defer taxes. There are also ordinary annuities, also called immediate annuities, purchased to create an income stream immediately. Finding the right annuity for you at age 70 requires understanding what you need and what different annuities offer.
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Instructions
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Determine the reason for the annuity. If you are still employed and want to deduct gross income, a qualified IRA annuity achieves this. If you are not looking to deduct income, a non-qualified annuity can house savings you don't anticipate needing in the next few years. An immediate annuity utilizes a lump sum payment to create a guaranteed lifetime income so you don't outlive your assets.
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Consider your age. When it comes to qualified annuities, there is a difference between age 70 and age 70 1/2. You can still make a traditional IRA contribution into an annuity at age 70, but will not be able to make any more once you turn age 70 1/2. You can contribute to a non-qualified annuity at any age.
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Choose the level of risk for your annuity. Annuities can be fixed or variable. Fixed annuities often compete with bank time certificate rates and are considered conservative. Variable annuities have a mix of mutual funds you can choose to create a diversified portfolio, often getting higher returns over time with various levels of risk. A 70-year old who doesn't have a lot of liquid assets outside of the money being invested in the annuity should maintain a conservative or moderately conservative portfolio to preserve assets in case money is needed.
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Find an annuity with the liquidity needed. If you live on a fixed income at age 70, accessing your assets in the event of emergency financial need is imperative. Annuities have terms ranging from one to 15 years. Some annuities offer a percentage you can access annually while others have additional rider benefits such as complete liquidity if you become disabled or require long-term care.
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Fill out an application for the annuity that meets your needs and objectives. Insurance agents, financial services advisors and banks offer annuities. Be sure to mark the correct box regarding the type of annuity you are opening: qualified or non-qualified.
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Fund the annuity. If you are opening a qualified IRA, you are limited to $6,000 per year based on 2010 IRS regulations ($5,000 plus $1,000 in catch up contributions for those over 50 years old).
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Tips & Warnings
To open a qualified annuity, you must have earned income at least equaling the contribution amount. The year you turn 70.5, you will need to take a required minimum distribution from all qualified accounts.
Non-qualified annuities do not have a required minimum distribution. There is not contribution limits to a non-qualified annuity, though some annuity companies may limit total contributions to $1 million.
Require minimum distributions must be taken from all qualified annuities by April 1 following the year you turn 70.5. Distributions are calculated by dividing your IRA value by the life expectancy factor found at IRS.gov. The factor is based on either your age or a spouse who is at least 10 years younger than you.
The Securities and Exchange Commission warns investors about the time frames required for annuity contracts. Using a variable annuity for a qualified plan does not provide any increased tax-benefits but does have additional costs for the annuity compared to brokerage IRAs offering mutual funds.
