Single-Premium Deferred Annuity (SPDA): What It Is and How It Works

Updated December 15, 2024

What Isও a Single-Premium Deferred Annuity (♏SPDA)?

A single-premium deferred annuity (SPDA) is an annuity established with one lump-sum payment to an insurance company. The assets in the annuity grow over time, during the 澳洲幸运5官方开奖结果体彩网:accumulation phase. That growth occurs on a 澳洲幸运5官方开奖结果体彩网:tax-deferred basis until the 澳洲幸运5官方开奖结果体彩网:annuitization phase, when regular payments begin. These payments, or distributions, are taxed when you take them, though how much depends on whether the annuity is qualified (澳洲幸运5官方开奖结果体彩网:funded with pretax dollars) or non-qualified (funded with post-tax dollars). Investment options vary. SPDAs can be either fixed (with a guaranteed, but modest, return) or variable (with the potential to make or lose money).

SPDAs may attract investors who have a large balance to invest, such as through cash savings, an inheritance, or a bonus. They are designed for individuals who want a steady income stream during retirement, and who have some time before they need access to these funds.

Key Takeaways

A deferred annuity is a contract between an individual and an insurance company that guarantees income upon maturation, often until the annuitant dies.
Single-premium deferred annuities (SPDAs) require only one lump-sum payment to fund the product.
SPDAs are designed for investors who are worried they may run out of retirement savings, and who have enough cash on hand to fund the up-front premium payment.

Un♋derstanding Single-Premium Deferred Annuities (SPDAs꧅)

Single-premium deferred annuities differ from 澳洲幸运5官方开奖结果体彩网:immediate contracts in that they grow tax-deferred for a period of time before annuitization. They also differ from flexible-premium deferred annuity contracts, where the investor makes multiple payments into the 澳洲幸运5官方开奖结果体彩网:annuity contract following the initial premiဣum during the accumulation▨ phase.

Most investors simply annuitize their funds to create an income stream. Some also purchase an optional rider, such as a 澳洲幸运5官方开奖结果体彩网:guaranteed withdrawal benefit, in which case the 澳洲幸运5官方开奖结果体彩网:annuitant may access the cash value of the annuity contract while still having an income stream that will last until death. Some contracts also offer 澳洲幸运5官方开奖结果体彩网:death benefits, where the annuity continues🐽 providing income after the annuitant has died.

Advantages of SPDAs

Single-premium deferred annuities may have fixed interest features that can provide reliable retirement income and act as a counterweight to market-based investments as part of a 澳洲幸运5官方开奖结果体彩网:diversified financial portfolio.

SPDAs may feature either a guaranteed interest rate or a rate based on a stock 澳洲幸运5官方开奖结果体彩网:market index. The return has a floor of 0%, meaning that the annuitant cannot lose money in a down market. When the market rises, the annuitant's return is based on a predetermined formula based on the index's gain. The owner may choose to limit their downside by giving up a portion of their upside.

Annuities are also tax-advantaged: tax on interest (earnings) income is deferred. This means taxes are only due when you take a distribution in retirement. If your 澳洲幸运5官方开奖结果体彩网:income tax bracket is lower in retirement than it is w♈hen you fund the account, you'll save money on taxes.

Do You Have to Pay Taxes on an Annuity?

When you withdraw funds from an annuity, or take a distribution, you will need to pay taxes on some or all of those funds. How much is taxable depends on how the annuity was set up. If you purchased the annuity with pre-tax money—that is, you didn't pay taxes on it yet—then the entire withdrawal will be taxed at your income tax rate. On the other hand, if you purchased the annuity with after-tax money—that is, you already paid taxes on it—then you'll only need to pay taxes on the earnings when you withdraw funds in retirement.

Note: An annuity purchased with pre-tax funds is called a 澳洲幸运5官方开奖结果体彩网:qualified annuity. An annuity purchased with after-tax funds is called a 澳洲幸运5官方开奖结果体彩网:non-qualified annuity. A qualified annuity gives you a 澳洲幸运5官方开奖结果体彩网:tax deduction when you purchase it, much like a 澳洲幸运5官方开奖结果体彩网:traditional 401(k) or 澳洲幸运5官方开奖结果体彩网:tradi🌱tional individual retirement account (IRA). It reduces your taxable income for the year you made the contribution. A non-qualified annuity does not, much like a 澳洲幸运5官方开奖结果体彩网:Roth 401(k) or Roth IRA—though the earnings grow tax-free.

How Are SPDAs Insured?

Single-premium deferred annuities (SPDAs) are not 澳洲幸运5官方开奖结果体彩网:FDIC-insured. They aren't given federal protection like bank accounts, which are protected by the 澳洲幸运5官方开奖结果体彩网:Federal Deposit🅺 Insuranc🤡e Corporation (FDIC). The FDIC protects balances up to $250,000 in the event of a bank failure. SPDAs receive no such guarantee. This is why it's vital to check the financial strength of the life insurance company that holds your annuity contract. You can check 澳洲幸运5官方开奖结果体彩网:credit rating agencies like Moody's or Standard & Poor's.

What Happens When a Deferred Annuity Matures?

You have a few options when a deferred annuity, such as a single-premium deferred annuity, matures. The most common is to annuitize the funds, distributing them in periodic payments, such as monthly. This income stream will continue until death; you can't outlive it. If you select a contract with death benefits, then the funds may be inherited by a 澳洲幸运5官方开奖结果体彩网:beneficiary you designate, such as a surviving spouse. Another option is to withdraw the funds in one 澳洲幸运5官方开奖结果体彩网:lump-sum payment. Note that if you do this before age 59 ½, you will be subject to a 10% early-withdrawal penalty by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS).

The Bottom Line

A single-premium deferred annuity is funded with one lump-sum deposit before the investment grows, and is then annuitized. It can come in several forms, such as fixed or variable. It is designed to ✃provide a reliable stream of income in retirement that cannot be outlived.

However, there are several downsides. There are many fees attached to annuities, from commissions to 澳洲幸运5官方开奖结果体彩网:surrender fees. Annuities may not match 澳洲幸运5官方开奖结果体彩网:inflation. And at certain points they are illiquid, making i☂t difficult for you to access your funds.

Take your time considering other opti꧑🍷ons. This financial product may or may not be worth it for you.

澳洲幸运5官方开奖结果体彩网