Have a Plan for Your Annuity

At Stock Yards Bank Wealth Management & Trust, we believe deeply in holistic financial planning. We support our clientele with a broad range of decision making which requires us to understand their full financial picture before we can professionally advise. In working with our clients to gather their financial details, two things become apparent. First, a lot of people have annuities. Second, most annuity owners don’t remember why they bought them, can’t describe the benefits of the contract and don’t have a particular plan for how to use them. 

Annuities are usually purchased with the idea that they will eventually play a specific role in your financial goals. But since withdrawals many times do not begin until later in life, clients either have forgotten what the original plan was or have not factored in that their life goals continue to evolve. Annuities can be flexible and offer different ways to help address an owner’s goals as they progress. But you must understand what your specific annuity can and cannot do efficiently. 

Annuities come in various forms: fixed (predictable returns), variable (market-linked), immediate (payouts start soon), or deferred (builds value over time). Fixed annuities offer stability amid market volatility, while variable ones allow for allocating investments among sub-accounts to optimize returns. Understanding how to use yours effectively can enhance retirement planning or supplement income. 

First, review your contract details. It’s important to confirm the type, surrender period (typically five to ten years with penalties for early withdrawal), and current value. Check for riders like death benefits or long-term care provisions that add value.

To start using it for income, consider annuitization. This converts your lump sum into periodic payments for life or a set period which can be made monthly, quarterly, or annually. For immediate annuities, payouts might already be active; for deferred ones, decide when to trigger them. If you need flexibility, explore systematic withdrawals. Many annuities permit penalty-free access to a portion (e.g., 10% annually) without surrendering the contract. This preserves principal while providing cash flow.

Tax implications are key: Earnings are withdrawn tax-deferred, but non-qualified annuities tax the gains in the contract as ordinary income. Qualified ones (from IRAs) follow retirement account rules. Exercise caution before making a full surrender due to the potential for inefficient taxation. 

Finally, integrate your annuity into broader finances. Use it alongside Social Security or pensions for diversified income. Consult your Stock Yards Bank advisor to model scenarios, ensuring they fit your goals without unnecessary costs. By proactively managing your annuity, you can turn it into a reliable asset for financial peace. We also recommend that you seek tax advice before implementing any changes.  

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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