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Is An Annuity An Income?

The question is whether an annuity counts as income. Is it possible to accrue a Social Security benefit if your primary source of income is an annuity, or is annuity income excluded? The income you receive from the annuity is considered ordinary income rather than earned income. It would be best if you consider Social Security and annuities. First, as I constantly tell people, Social Security is the best inflation annuity globally. Everyone in the United States with a Social Security number already owns an annuity. An annuity provides you with a lifetime income stream. Examples include lifetime income annuities, pensions, and insurance and mortgage payments. In addition to pensions and Social Security, an annuity can provide a lifetime income stream. However, it is taxed at ordinary income levels. Disclaimer: I’m not tax-savvy. It would be best if you did not accept tax counsel from anyone else unless they are a CPA or a tax lawyer because those two groups specialize in tax advice. Here, I’m providing a high-level view of what you’ll need to do to get a definitive answer from your tax attorney or CPA: take that 30,000-foot view advice, validate it, and get the absolute answer from them. But one question I’ve been asked is whether payments from an annuity affect Social Security. You can’t say yes or no because it depends on your position and the income you already receive from other sources. It depends on your position, the income you receive, and where it comes from. One of the final remarks I’ve received is that someone is considering changing a 401(k) to an annuity for a lifetime income stream. That’s an excellent idea, but we need to explore it deeper. There are simply two questions that you must ask and answer. First, what do you want the money to accomplish contractually? Second, when would you like to begin receiving those contractual assurances? In this case, they are considering income from the 401(k), converting those assets as growth assets and accumulation assets into decumulating lifetime income. So, my next question is: When do you hope to see some money rolling in? Do you want it to begin straight away? That’s all right. That is known as a Single Premium Immediate Annuity (SPIA), or, you know what? I’m 59.5 years old. I’m not sure I need the money right now, but I might need it when I’m 65. Then, if it’s a 401(k) asset, we’ll mention Deferred Income Annuities, Qualified Longevity Annuity Contracts (QLAC), and income riders. I’d have to ask you a couple of additional questions: Do you want income? We’d have to figure out whether you want it now or later, but do you have a specific monetary amount in mind? In other words, do you want $1,000, $2,000, $3,000, or $2,250 every month starting now or in three, five, or seven years? I’m trying to convince you that you need to be specific about what you want to do. When I say annuities, I refer to at least seven different types. You must approach me and say, “I need this exact amount of income,” or “I’m thinking about converting this amount of the 401(k) into a lifetime income stream using a specific annuity type.” I need you to consider converting the entire thing, and if anybody comes to you and says, “Let’s take the entire 401(k) and lump it into this annuity.” You’ve got to tell that sparky agent to wait on. Take it easy. Remember, this is somewhat controversial. The annuity industry frowns on putting more than 50% of your investable assets into annuities. Are there any carriers who will go above and beyond? Yes, it depends on the circumstances. I always recommend that people spend as little money as feasible to solve a specified lifetime income target. I’d prefer it if you came to me and said, “Based on my projections, my spreadsheet, and my boxes,” I need $2,000 per month right now, five years from now, or seven years from now. Fantastic. That brings us to the following question. What about inflation? Who is the Annuity Man? On the other hand, annuities aren’t a foolproof way to protect against inflation. Keep in mind that you already have access to the most advantageous inflation-protected annuity available in the world through social security. On the other hand, commercial annuities are those offered by private companies outside of government. Companies that sell annuities don’t give that extra money away. Annuities are customizable, which means you have to talk about the specifics of what you want to do and then look at all carriers for the best contractual guarantee for your specific situation that helps you reach your particular goal. You will then have enough information to decide based on your terms and time frame. Never lose sight of the fact that you live in reality, not a dream, and secure your financial future with annuities and contractual assurances.
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Bio:
30 + years as a Financial Planner. Securities (Series 1,7, and 65) and Insurance Licensed. Retirement Planning including the actual planning of where your income will come from as well as a discussion of products to get you there. The market has been volatile since Covid broke out and many people are not comfortable with this. If you are retired we will look at your total income and tax situation. If you are still working we have some more time to plan.

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Thomas Sweet

Thomas Sweet has 30 + years as a Financial Planner. Securities (Series 1,7, and 65) and Insurance Licensed. Retirement Planning including the actual planning of where your income will come from as well as a discussion of products to get you there. The market has been volatile since Covid broke out and many people are not comfortable with this. If you are retired we will look at your total income and tax situation. If you are still working we have some more time to plan.

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