Perhaps you like the security of a guaranteed annuity over fluctuations in the stock market. Maybe you’re looking to move money from a low interest savings account or CD into a higher interest annuity. Regardless, you’re intrigued by the prospect of annuities, but aren’t sure if now is the right time in your life to purchase one.
What is the right age to purchase an annuity?
So at what age should you consider purchasing an annuity? To answer that question, you first need to ask yourself where the money will be coming from – is it qualified or non-qualified?
In other words, is the money you’ll use to pay the premium for your annuity coming from a source that is already receiving tax-deferral benefits, like an IRA or 401k account? Money in a qualified investment is meant for retirement and includes a 10% penalty tax for withdrawing money prior to age 59 ½.
Purchasing an annuity with qualified funds
An annuity also has tax-deferral benefits and therefore also includes a 10% penalty for withdrawing money before you reach age 59 ½. So if you plan on rolling funds from within a 401k into an annuity, for example, there’s really no “right” age at which to do so. Your money is already essentially tied up until age 59 ½, so you aren’t limiting your access to funds which you would otherwise be able to touch before 59 ½. In short, if you want to roll money from a qualified account into an annuity, do so whenever you feel you’d rather protect yourself from potential fluctuations in the value of your account – basically as you become more risk averse with your money.
Purchasing an annuity with non-qualified funds
If the funds you plan to use to purchase your annuity are non-qualified funds – for example, money in a savings account or invested in stocks – then the age at which you purchase an annuity becomes more important. If you’re already 59 ½ or older, you’re past the tax penalty threshold age, so an annuity might be right for you.
If you’re younger than 59 ½, the question becomes: at what age will you need to access the funds you plan on using to purchase the annuity? If the answer is after age 59 ½, then you’re the “right” age for purchasing an annuity.
Let’s look at an example. Say you’re 55 years old and have $20,000 that had been invested in a certificate of deposit (this is an example of a non-qualified investment). The current rate for a 1 year CD is about 1.25% (with a $10,000 minimum investment). You look for a higher interest rate position, but don’t want to risk losing money in the stock market as you approach retirement. Currently, there is a multi-year guaranteed annuity (MYGA) with a 3.15% interest rate on the market. Whether or not you’re the right age to consider purchasing this MYGA depends on whether you’re comfortable not touching your $20,000 investment for another 4 ½ years*.
Fifty-nine and a half is the “magic” age for annuities
To summarize, if you’re already age 59 ½ or older, you don’t have to worry about any tax penalties when you withdraw from your annuity. If you’re younger than age 59 ½, consider whether the funds you’ll use to purchase the annuity are coming from a qualified investment (think IRA or 401k). If not, then the age at which you should feel comfortable purchasing an annuity is at whatever age you determine you can hold off on touching the funds until after age 59 ½. For perspective, the majority of our annuities clients are in their 50s and 60s.
If you’d like to talk to an agent for more information on annuities, don’t hesitate to give us a call or email us. You can also request a free, no-obligation annuity quote.
*Technically, in this example, the MYGA is a 5-year annuity, so you’d want to hold off on touching the funds until age 60 to avoid any surrender charges.
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