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What Does It Mean When You Annuitize an Annuity?

Stan Haithcock
February 12, 2024
What Does It Mean When You Annuitize an Annuity?

What does it mean when you annuitize an annuity? I'm going to tell you that, but not until I tell you who I am. I'm Stan The Annuity Man, America's annuity agent, licensed in all 50 states. This is going to be a fun topic because annuities are fun. So, let's get into it.

‌We're going to cover a ton today. I'm going to talk about the history of annuities. I'm going to talk about what annuitization and drawdown mean. We're going to cover some taxation issues and all of that stuff.

‌Brief History

‌Let's briefly talk about the history of annuities. Single Premium Immediate Annuities started in Roman times, way back then, and have been sold in this country for a couple of hundred years. And the sister product of the Single Premium Immediate Annuities, the Deferred Income Annuity, and the Qualified Longevity Annuity Contract. Fixed Index Annuities were introduced in 1995 as another CD product; that's a fixed product, not a security. Variable Annuities were then introduced in the 1950s for tax-deferred growth and Multi-Year Guarantee Annuities, which are CD products. They've been around for a long time as well. I don't have the date on that one. I need to get the date. I'm Stan The Annuity Man, right? But those are also great products if you want to protect the principal and get a guaranteed interest rate.

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‌So, what is the definition of annuitization? Annuitization in Stan The Annuity Man's world is like going to a water faucet, ripping the knob off it, and the water flows. That's annuitization. The water is not water; it's income. An Immediate Annuity is a return of principal plus interest and will pay you for the rest of your life if you get a lifetime income guarantee. But it is an irrevocable contract. Regardless of how long you live, that income will hit for the rest of your life. That's annuitization.

‌I got a call the other day from a guy who wants to have a lifetime income stream, say, seven years from now. Under that scenario, I ran a Deferred Income Annuity quote and a lifetime Income Rider quote. Now those are two separate products. One's an annuitization product; one's a drawdown product. Let's go through that.


‌The Deferred Income Annuity is an annuitization product. It's an irrevocable lifetime income stream, ripping the knob off the water faucet, the water's coming, the income's coming. A lifetime Income Rider, the majority of those are what's called drawdown products. In essence, you're just taking money out of the account. You're not losing control of the asset; you're not annuitizing.

‌Which Is Better?

‌The person's question was, which one is better Stan The Annuity Man? And the answer is that it just depends. It depends on your situation. And that's the reason we were talking. Now with his specific situation, he wasn't sure he would turn on the income stream in seven years. So, I said, "Hey, under that scenario, let's stay a little bit flexible and let's go with the Income Rider, all right?" The other determining factor when I ran those two quotes for what I call income later is who has the highest contractual guarantee. Is it the Deferred Income Annuity or is it the Income Rider? That's another determining factor. Do you want to rip the knob off the water faucet and have the annuitization of the money coming, or do you want to control the asset and have the withdrawal?

‌Again, no perfect answer is just bad sales pitches. It comes down to your specific situation. But in this specific situation, because he needed the money to be flexible, he wasn't sure when he would turn on the income stream, so the Income Rider fit the best. But maybe you're different. Maybe the Deferred Income Annuity fits the best. But, at the end of the day, we're going to start with quoting all carriers, both strategies and then we're going to look at the guarantees and make those decisions based on the benefits and limitations and your specific goals.

‌So, when you annuitize an annuity for lifetime income, just remember that lifetime income, regardless of the product type, Single Premium Immediate Annuity, Deferred Income Annuity, Qualified Longevity Annuity Contract, and even Income Riders, the income is a combination of return of principal plus interest. Now, the annuity company's on the hook to pay. You've transferred that risk to them to pay you for the rest of your life. But remember that the combination of return of principal plus interest is what you're getting when you're getting a lifetime income stream.


‌Let's talk about the taxation of annuitized income; it comes down to what type of account you have the annuitized product inside. With a Roth IRA, that income stream is going to be tax-free. In an IRA, an annuitized product that's creating the income you've been deferring all this time in an IRA, all of that income stream will be taxable ordinary income levels.

‌In a non-IRA setting, because lifetime income with an annuitized product is a combination of return of principal plus interest, you will only be paying taxes on the interest portion of that income stream until the accounts are at zero. And then, when it's at zero, they'll still pay for the rest of your life. But once it reaches zero, all of that income stream will be taxable in a non-IRA account.

‌Hey, thanks for joining me today. Remember to go to my site, for all things annuities. You can run your own quote and your annuitization quotes if you want. You can get Income Rider quotes there. Please get my books as well; I've published seven books. You can download six of them for free just because I'm nice. You can schedule a call with me or one of my intelligent team members. It can't get better than that. I'm America's Annuity Agent.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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