Sources of Funds to Purchase an Immediate Annuity


An immediate annuity is a good way to invest large lump sum of money accumulated through a deferred annuity, a retirement plan or other savings options. It can provide dependable security and a stream of income payments that will continue for the rest of your life or for a period you select. It can be purchased with funds from a various sources, like, maturing CD, money accumulated in a deferred annuity , 401k or IRA account.

Funds that purchase an immediate annuity can be of two types qualified and non-qualified. The term qualified when applied to immediate annuities refers to the tax status of the source of funds used for purchasing the annuity. These are premium dollars which until now have qualified for IRS exemption from income taxes. The whole payment received each month from a qualified annuity is taxable as income.

Qualified annuities can come from corporate-sponsored retirement plans for example:- defined benefit or defined contribution plans, Lump Sum distributions from such retirement plans. Qualified annuities can also come from such individual retirement arrangements like IRAs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or life insurance exchanges.

Insurance companies generally use sex-distinct rates to price qualified annuities in situations where the purchaser and/or owner is a corporation. When the annuity is being purchased by an individual, annuity rates are generally unisex.

Non-qualified immediate annuities are purchased with monies which are not tax-sheltered and for which taxes have already been paid. A part of each monthly payment is considered a return of previously taxed principal and therefore excluded from taxation. The amount excluded from tax is calculated by Exclusion Ratio, which appears on most annuity quotation sheets.

Non-qualified annuities can be purchased by employers for situations such as deferred compensation or supplemental income programs, or by individuals investing their after-tax savings accounts or money market accounts, proceeds from the sale of a house, business, mutual funds, CDs, other investments, or from an inheritance or proceeds from a life insurance settlement.