Annuity owner advised to build an emergency fund due to limited access to funds — MarketWatch
A 65-year-old owner of a 10-year annuity that pays $2,000 per month reported a lack of available cash and concern about the tax consequences of using money to purchase a condominium. As MarketWatch reports, the annuity was purchased with pre-tax funds, and the invested amount cannot be used during the 10-year term.
Limited access to savings
The reader noted that the amount of payments under the contract depends each year on the performance of the S&P 500 index. The columnist suggested that the product described could be a multi-year guaranteed annuity, or MYGA. She compared such an instrument to a bank deposit or Treasury product designed to provide guaranteed returns over a specified term.
In the columnist's assessment, concentrating most retirement savings in one such product narrows the owner's options when money is needed. She noted that diversification involves not only combining stocks and bonds, but also different types of accounts and instruments with different maturity dates.
The columnist also drew attention to reinvestment risk: after the MYGA term ends, the owner will have to decide where to invest the funds next. The level of rates at that time is unknown in advance. She advised, if necessary, creating a "ladder" of fixed-income instruments with different maturities in order to have access to part of the money for major expenses.
More current news is available on the UA.News Telegram channel Telegram.
Taxes and an emergency fund
Because the annuity was purchased with pre-tax funds, each payment is considered taxable income. The monthly $2,000 amounts to $24,000 per year, and the tax amount depends on other income, including Social Security payments and capital gains income in a brokerage account. At a 12% rate, the tax on these payments may amount to less than $3,000 per year.
At the same time, a one-time withdrawal of a significant amount after the 10-year term ends to purchase a condominium may raise the tax rate. The columnist noted that annual income above $109,000 may result in an IRMAA surcharge on Medicare payments and affect the taxation of Social Security.
While the funds remain inaccessible, the owner was advised to set aside part of the monthly payments in an emergency fund. As the contract's end approaches, he can assess his goals, consider fixed-income instruments and, in part, index funds, having first taken into account the terms of the new investment.
