Split Annuities: Can They Work for You?

Split AnnuitiesBy Toma Franklin, Staff Writer

What are split annuities, and how do they work? The term split annuity would seem to mean an annuity split into two or more parts but actually it is only a concept. The concept is to place on deposit a certain amount of funds into one or more annuities to achieve an immediate need of income and then a second fund to replace the income at a later date.

As an example: Using $100,000 deposit, $50,000 would be deposited into a standard tax deferred annuity earning interest. A second $50,000 would be placed in an immediate annuity to receive income for a specific time period (such as 5 years). When that income expires, the second annuity would convert from a deferred annuity to an income annuity. Split annuities can offer many benefits and a flexibility to conform to individual needs.

The combination of these two annuity types can offer more financial diversification by using different available crediting rates: one for the immediate annuity and one for the deferred annuity. A split annuity combines the benefits of a deferred annuity with the immediate income. The immediate annuity portion of the split annuity guarantees a monthly income now with the assurances of greater income once the tax deferred portion is converted to an immediate annuity in later years. The tax deferred portion will grow over the time period and be larger than the original deposit.

The immediate annuity also has little tax liability because the portion of the original deposit is spread out over a long tax period meaning that when these funds are paid, they are paid tax free (original deposit). Also the estimated earned interest on the immediate income is spread over the whole time period of the annuity payments thus spreading out the tax liability. A significant portion of the income received each month from the immediate portion of the annuity policy is not taxable.

When considering the use of a split annuity make certain you have several companies bidding for your business. Often time rates will vary from one company to another and these rates can offer significant difference in both immediate income and future values of the tax deferred portion. A little research will provide you with available options, highest available rates and the bets benefits offered.