37:["$","$L38",null,{"category":"$39","relatedArticles":[{"id":"cG9zdDoyNjY5Mzk=","databaseId":266939,"postId":266939,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":802,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ3OA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19478,"categoryId":19478,"link":"https://smartasset.com/rollovers-and-conversions/articles","name":"Rollovers & Conversions","postCount":{"pageInfo":{"offsetPagination":{"total":54,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"rollovers-and-conversions","ancestors":{"nodes":[{"name":"Retirement","slug":"retirement","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Retirement","id":"dGVybTo5Mw==","slug":"retirement","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$3a","date":"2024-11-18T09:32:49","excerpt":"

Transferring some of your retirement savings from a tax-deferred account like a 401(k) to a Roth IRA can help you reduce or possibly avoid required minimum distributions (RMDs) and income taxes later on. It can also be beneficial if you want to leave tax-free savings to your heirs. A Roth conversion can therefore provide you […]

\n","featuredImage":{"id":"cG9zdDoyNjg3Njk=","databaseId":268769,"altText":"","date":"2024-11-18T09:18:02","fileSize":190869,"mimeType":"image/jpeg","modified":"2024-11-18T09:18:14","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/10/iStock-1315122801-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-11-18","readable":"November 18, 2024","readableExtended":"November 18, 2024, 9:32am ET"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTY=","databaseId":196,"userId":196,"avatar":{"url":"https://secure.gravatar.com/avatar/7eaae8752922e4afcde743b2103c2edf?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jaclyn is the Director of Economic Analysis at SmartAsset and a CERTIFIED\r\nFINANCIAL PLANNER™. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. 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As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn, CFP®","lastName":"DeJohn, CFP®","name":"Jaclyn DeJohn, CFP®","postCount":{"pageInfo":{"offsetPagination":{"total":87,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn2","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. 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In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":802,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"factCheckedBy":null,"secondEditor":null,"hideAuthor":null,"__typename":"Post_Multiplebylinesbyrole"},"adTargetingOverrides":{"fieldGroupName":"adTargetingOverrides","pageGroupNewKey":null,"__typename":"Post_Adtargetingoverrides"},"seo":{"canonical":"https://smartasset.com/retirement/retire-4-years-convert-25-percent-401k-rmds-taxes","metaDesc":"Converting 25% of a large 401(k) could lead to a sizable tax bill you’ll have to pay right now. You may want to consider a strategy based","metaKeywords":"","metaRobotsNofollow":"follow","metaRobotsNoindex":"index","readingTime":6,"title":"I Want to Retire in 4 Years. Should I Convert 25% of My 401(k) to a Roth IRA Per Year Until Then to Avoid RMDs and Taxes?","__typename":"PostTypeSEO"},"slug":"retire-4-years-convert-25-percent-401k-rmds-taxes","status":"publish","title":"I Want to Retire in 4 Years. Should I Convert 25% of My 401(k) to a Roth IRA Until Then to Avoid RMDs and Taxes?","uri":"/retirement/retire-4-years-convert-25-percent-401k-rmds-taxes","tags":{"nodes":[{"name":"news-sitemap","__typename":"Tag"}],"__typename":"PostToTagConnection"},"__typename":"Post","adPageGroupOverride":null,"bylines":{"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":"$3b","description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. 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","

However, you can’t escape paying income taxes on your tax-deferred savings entirely, and converting 25% of a large 401(k) could lead to a sizable tax bill you’ll have to pay right now. You may want to consider a conversion strategy based on keeping you from entering a higher marginal income tax bracket rather than converting a set percentage, although other timing factors may come into play.

","

Here are some factors to think about. You can also get matched with a financial advisor for free if you need help developing a 401(k) conversion plan that will balance present and future tax consequences.

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Roth Conversion Rules

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Because Roth accounts are not subject to the required minimum distribution (RMD) rules that apply to 401(k) accounts, a retirement saver may want to consider converting funds from a 401(k) to a Roth IRA. Under RMD rules, funds left in a 401(k) or similar tax-deferred account have to be withdrawn on a strict schedule starting at age 73 or 75, depending on your birth year.

","

Unlike Roth withdrawals, which are usually tax-free, 401(k) withdrawals are treated as taxable income. As a result, taxable RMDs can force a retiree into a higher income tax bracket and potentially pose a financial hardship in your golden years when you may be on a fixed income. By reducing or eliminating the need to take mandatory RMDs, a saver can look forward to the likelihood of paying fewer income taxes in retirement and having more to spend on lifestyle expenses.

","

Examples: Taxes Owed on Roth Conversion Strategies

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The challenge of Roth conversion is that amounts transferred from a tax-deferred account to a Roth IRA are considered taxable income. In the case of a sizable conversion, this can bump a saver into a higher marginal income tax bracket and lead to a large tax bill that is due when filing the current year’s return.

","

For example, if your 401(k) is worth $1 million and you convert 25% in one year, or $250,000, that would add $250,000 in taxable income to your current income. If you are a single filer with no other income, this would put you in the 32% marginal tax bracket and lead to a tax bill of approximately $53,014, using the rates in effect for the 2024 tax year.

","

You may be able to manage the tax impact by spreading the conversion out over more years. For instance, if you are 63 now, you have 10 more years before your first RMD is due at 73. Converting 10% or $100,000 each year would put you in the 22% bracket for tax year 2024. Then you’d face an annual tax bill of about $13,841 if you had no other income.

","

A somewhat different strategy is to focus not on the percentage of your 401(k) you’ll convert each year. Instead, chiefly consider the impact the conversion will have on your tax bracket and current year tax bill. For instance, if you are a single filer with $110,000 of taxable income, you will be in the 24% bracket for 2024. In that situation, you can convert $81,950 before your taxable income reaches the threshold of $191,151, which would catapult you into the 32% tax bracket and make it so that any additional dollars converted come with a heftier tax bill.

","

A financial advisor can help you run the math in your situation. Use this free tool to match with up to three vetted fiduciary advisors.

","

Roth Conversion Refinements

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Some people may want to consider the possible impact of the five-year rule on conversions. This regulation imposes a penalty on withdrawal of any earnings of converted funds if they are taken sooner than five years from the time the funds were converted. The five-year rule only applies to withdrawals taken by people who are under age 59 ½, however, so it may not affect you if you plan to start taking withdrawals after that time.

","

Another factor to keep in mind is your likely tax rate after retirement. If you will be in a lower tax rate after retirement, you may not want to do a Roth conversion now, as this might result in you paying more taxes over all. Still, some people might like the flexibility to avoid RMDs, or want to use a Roth IRA as a tax-free inheritance mechanism for their heirs if they expect to have money left over at the end of their lifetime. Consider weighing the pros and cons based on your goals with a financial advisor.

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Bottom Line

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Converting all or a significant part of a large 401(k) can result in a big current tax bill. Balanced against that is the prospect of avoiding RMDs. You may be able to better handle the tax impact of a conversion if you spread the conversion process out over several years, gradually converting a 401(k) to a Roth rather than doing it all at once. However, it’s likely more effective to base the amount you are converting on the immediate impact on your marginal tax bracket, rather than simply converting a set percentage every year. Converting just enough to bring you up to the top of your current tax bracket is one way to do this.

","

Tips

","$4c","

Photo credit: ©iStock.com/Kiwis

"],"experts":null,"link":"/rollovers-and-conversions/retire-4-years-convert-25-percent-401k-rmds-taxes","modifiedIso":"2024-11-18T09:32:50.000Z","published":{"datetime":"2024-11-18","readable":"November 18, 2024","readableExtended":"November 18, 2024, 9:32am ET"},"publishedIso":"2024-11-18T09:32:49.000Z","shareInfo":{"title":"I Want to Retire in 4 Years. Should I Convert 25% of My 401(k) to a Roth IRA Until Then to Avoid RMDs and Taxes?","origin":"/retirement/retire-4-years-convert-25-percent-401k-rmds-taxes"},"isNewsArticle":true},{"id":"cG9zdDoyNzIyNjI=","databaseId":272262,"postId":272262,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":802,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTQ3OA==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19478,"categoryId":19478,"link":"https://smartasset.com/rollovers-and-conversions/articles","name":"Rollovers & Conversions","postCount":{"pageInfo":{"offsetPagination":{"total":54,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"rollovers-and-conversions","ancestors":{"nodes":[{"name":"Retirement","slug":"retirement","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Retirement","id":"dGVybTo5Mw==","slug":"retirement","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$4d","date":"2025-01-16T09:53:19","excerpt":"

Transferring retirement savings from a 401(k) or similar tax-deferred account to a Roth IRA can help keep you from having to make taxable withdrawals by the time your reach your mid 70s. This can reduce your tax burden after retiring, but it won’t necessarily save on taxes overall. That’s because any funds converted to a […]

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As a past real estate licensee and Reatlor®, Jaclyn managed contracts for residential properties, while working closely with first-time homebuyers, investors and mortgage brokers.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Jaclyn","fullName":"Jaclyn DeJohn, CFP®","lastName":"DeJohn, CFP®","name":"Jaclyn DeJohn, CFP®","postCount":{"pageInfo":{"offsetPagination":{"total":87,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"jdejohn2","__typename":"User"},"reviewedBy":null,"writtenBy":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. 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","

Conversion may still make sense if you expect to be in a higher tax bracket after retiring and reaching the mandatory withdrawal age, don’t need the RMD money, want to preserve wealth for your heirs or in other circumstances. But the most effective conversion strategy is likely not be based on converting a set percentage of your 401(k) each year. Rather, you may be better off calculating the conversion amount based on the effect on your tax bracket.

","

A financial advisor can help you assess the pros and cons of a Roth conversion strategy. Use this free tool to get matched today.

","

Roth Conversion Rules

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If you’re 58 now and leave your retirement savings in the 401(k), you’ll have to start taking required minimum distributions (RMDs) of pre-determined amounts each year starting at age 75. These withdrawals will be treated as taxable income, and the resulting tax bill will reduce the income you have available to pay living expenses in retirement.

","

You can convert funds from tax-deferred to tax-free by transferring them from a 401(k), IRA or other tax-deferred retirement savings account to a Roth IRA. Once in the Roth account, the funds are not subject to RMD rules, so you won’t have to worry about having to withdraw money you don’t need for living expenses.

","

If you do need the money you’ve saved for retirement, you can withdraw from Roth accounts without owing any taxes or penalties. The only limitation here is that you must wait at least five years after the conversion before making withdrawals if you make the conversion before you are age 59.5.

","

Roth conversions come at a cost, however, because the converted amounts will be treated like ordinary income on your current tax return. Converting a large 401(k) can, therefore, lead to a sizable tax bill in the short-term. With this in mind, many people doing conversions opt to do so gradually, converting a portion of the 401(k) year over several years to spread out the tax bill and prevent yourself from entering higher tax brackets where your money will be charged at higher rates.

","

The decision to convert a 401(k) to a Roth, and how much to convert, rests on several interdependent factors, including your current income and anticipated taxable income after retirement. It’s also worth keeping in mind the fact that Roth withdrawals are not considered when determining income levels that affect Social Security benefit taxation and Medicare premiums.

","

Remember, a financial advisor can help you determine and execute an appropriate strategy based on your circumstances.

","

Roth Conversion in Action

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If you are a relatively high earner with $100,000 in taxable income, you will likely be in the 22% marginal income tax bracket and would owe $13,841 in federal income tax on your 2024 return. Converting 10% of your $1.7-million 401(k) would add $170,000 to your current taxable income. As a single filer, the resulting $270,000 in income would lift you to the 35% bracket and result in a federal tax bill of approximately $59,754 for that year.

","

If you instead follow a strategy of converting only enough to lift you to the top of the next-highest bracket, you could convert $91,950. This would keep you in the 24% bracket and result in a current tax bill of $35,606.

","

Neither of these gradual conversion strategies would completely empty your 401(k) in 17 years, when you’ll reach age 75 and be subject to RMDs. So you’ll still have to take some taxable mandatory withdrawals, or you may have to bite the bullet and take on higher tax rates to convert the entire 401(k) in time. Ultimately, there are a lot of dynamics at play with your income and taxes over time. But given the difficulty of forecasting income tax rates and your own income that far in the future, it can make sense to have funds in a 401(k) as well as a Roth to provide you with flexibility.

","

Consider speaking with a financial advisor to further explore the tradeoffs for a Roth conversion based on your circumstances and goals.

","

Bottom Line

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Converting funds from a 401(k) to a Roth IRA can help you avoid RMDs and future taxes. However, the conversion will cost you today in the form of added income taxes. You may still want to do the conversion, especially if you think you’ll be in a higher tax bracket after retirement. However, a conversion strategy based converting just enough funds to lift your income the top of your current or the next-highest tax bracket is likely to make more sense than aiming to convert a set percentage each year.

","

Tips

","$5f","

Photo credit: ©iStock.com/Abdullah Durmaz

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If you are a current or former public sector employee or a survivor, spouse or ex-spouse of someone like that, you may receive more from Social Security as a result of new federal legislation. The Social Security Fairness Act repeals two federal laws that for decades have reduced or eliminated Social Security benefits for some people who had pensions and worked in jobs that didn’t pay into Social Security at some point in their careers. As a result, millions of recipients could get an average of $360 more per month for life.

","

A financial advisor can help you project your Social Security benefits and plan claiming strategies.

","

Fairness Act Fundamentals

","

On January 5, 2025, President Joe Biden signed the Social Security Fairness Act into law. The act increases the ability of millions of retirees to claim government retirement benefits. It does this by turning back the clock, repealing two laws enacted more than 40 years ago that limited benefits available to people who were covered by pensions and had at some point worked in jobs that don’t pay Social Security taxes.

","

The two repealed laws are the Windfall Elimination Provision (WEP), enacted in 1984, and the Government Pension Offset (GPO), which became law in 1977. The original laws were passed at a time when Social Security funding was being strengthened. They pursued this goal by reducing the benefits paid to people who worked part of their careers in government, religious and non-profit sector jobs that had pensions but didn’t withhold Social Security taxes.

","

With the new law, millions of people now become eligible for benefits or for increases to their existing benefits. The average benefit increase will be $360, according to a statement from Biden. And the law makes increases retroactive to 2024, so eligible retirees may receive a lump sum payment for benefits they would have gotten for that year under the new law.

","

Benefit Claiming Strategies

","

The Social Security Fairness Act will likely affect some retirees’ claiming strategies. One of the biggest impacts is more filings for benefits by people whose monthly payments would have been reduced to zero by the GPO. With no financial advantage to filing, some of these people didn’t file to receive Social Security. Now that they can expect a payment, many probably will submit the paperwork.

","

WEP reduced but did not eliminate benefits for affected retirees. As a result, Social Security-eligible retirees impacted by WEP typically have already filed for their benefits. These retirees don’t have to do anything but wait in order to get the larger benefit afforded by the Social Security Fairness Act. As Social Security processes the changes, these retirees will receive the new, larger checks.

","

WEP-affected retirees who have not filed may immediately receive the higher payment when they submit their initial Social Security benefit claims. However, some who were about to file may decide to delay their claims because waiting results in higher benefit amounts.

","

A financial advisor can help you navigate changing Social Security rules and build a plan to maximize your retirement income. Get matched with an advisor today.

","

Fairness Act Impacts Illustrated

","

As an example of how the new law could work, consider a married couple with one spouse who receives $4,000 each month from a pension provided by a public-sector job that did not pay into Social Security. The other spouse worked in the private sector, paying into Social Security enough to be eligible for a $2,000 monthly government retirement benefit.

","

Under now-repealed GPO rules, spousal benefits were only paid if half the benefit amount exceeded two-thirds of the pension amount. Half the $2,000 benefit amount, or $1,000, is less than two-thirds of the $4,000 pension, or $1,333. So, this spouse has until now gotten nothing from Social Security. With the new act, this couple can now potentially receive another $2,000 per month, a sizable boost to their retirement budget.

","

Social Security System Effects

","

In a typical year, about 6% of workers don’t earn credits that would entitle them to Social Security, according to a Congressional Research Report that looked at 2021. Some of these workers are eligible for pensions, making them directly impacted by the new Fairness Act.

","

However, the law may affect a much bigger population consisting of everyone who pays Social Security taxes and can expect to receive these benefits in retirement. According to Social Security, that’s a large group, with nearly nine of 10 people age 65 and older receiving Social Security benefits in June 2024.

","

The Fairness Act will impact all recipients by adding to the costs of Social Security and, therefore, potentially moving forward the date at which the financially stressed government retirement program is unable to pay benefits at the current rate. That point has been forecast to arrive in 2033, but the new law likely moves the date forward about six months.

","

To avoid having to reduce benefits, possible fixes include increasing the age, currently 67, when recipients are eligible for full retirement benefits or increasing the amount of Social Security taxes withheld from workers’ paychecks. Another option is to tax wages of higher earners.

","

You can use this free tool to match with a financial advisor if you have questions about your Social Security benefits, taxes and other retirement elements.

","

Bottom Line

","

The Social Security Fairness Act makes it possible for millions of workers to receive more retirement income. It does this by repealing two laws that limited Social Security benefits to people who worked for a time in jobs that had pensions and did not pay into Social Security. The average affected retiree will get $360 each month as a result of the change. Because the boost is retroactive, retirees can expect lump sum payments for increased amounts that would have been paid in 2024. The change will also influence filing strategies for affected workers, spouses and survivors.

","

Tips

","$72","

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Annuities can be a good option for investors seeking steady income during retirement. To get started, it’s important to learn some basic annuity terms. These 12 key terms will help you understand how annuities work and whether they fit your retirement plan. A financial advisor can also help you evaluate an annuity contract for your […]

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","

How an Annuity Works

","

An annuity is a financial product that provides a steady income stream, often used for retirement planning.

","

When you buy an annuity, you contribute funds to an insurance company, which agrees to make periodic payments in the future. These payments can be customized to suit your needs, making annuities a dependable way to secure income and stretch your retirement savings.

","

There are three main types of annuities:

","

Fixed annuities provide guaranteed payouts for predictable income.
Variable annuities let you invest in funds, with payouts depending on investment performance.
Indexed annuities link returns to a stock market index and offer some protection against market losses.

","

Annuities come with benefits like guaranteed income and potential tax advantages but also have drawbacks. Most notably, fees can vary widely and affect your returns, and contracts can offer limited liquidity.

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12 Annuity Terms to Know

","

","

If you are considering an annuity as part of your retirement plan, these 12 common terms can help you understand how annuity contracts work:

","

Annuitant: The annuitant is the person whose life expectancy determines the annuity payments. Their age and life expectancy are used to calculate the payment amounts and they usually receive the income from the annuity.

","

Beneficiary: A beneficiary is the person or entity chosen to receive any remaining annuity benefits after the annuitant’s death. Naming a beneficiary allows the annuity’s value to be distributed according to your plans.

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Accumulation phase: This is the period when you contribute to the annuity. During this time, your contributions grow tax-deferred, allowing the investment to increase in value before payouts begin.

","

Distribution phase: The distribution phase, also called the payout phase, is when the annuity starts providing income to the annuitant. Payments can be structured as a lump sum or regular installments over a set period.

","

Surrender charge: A surrender charge is a fee for withdrawing funds from an annuity before a set time. Knowing these charges can help you avoid unexpected costs if you access your money early.

","

Rider: Riders are optional additions to an annuity contract that customize it to your needs. Common examples include guaranteed lifetime withdrawal benefits and long-term care coverage.

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Fixed vs. variable annuities: Fixed annuities provide guaranteed payments, while variable annuities have payments that change based on investment performance. Your choice depends on your risk tolerance and financial goals.

","$80","

Bottom Line

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Annuities provide a steady income stream, but understanding the terms can be challenging. Key terms like “deferred annuity” and “immediate annuity” determine when payments begin. “Deferred annuities” let your investment grow tax-deferred until you withdraw, while “immediate annuities” start payouts soon after a lump sum is invested. For more clarity, consider speaking with a certified retirement financial advisor (CRFA).

","

Retirement Planning Tips

","$81","

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