Split Funded Annuity

Split funded annuity definition


A split funded annuity is a combination of two types of annuities; the first part is an immediate annuity that provides a partially taxable income stream, while the second component is a tax-deferred annuity that builds up value for the eventual payout period. The dual nature of split funded annuities allows investors to enjoy additional cash from immediate earnings while saving up funds for the future. This makes split funded annuities a popular choice for younger individuals who can, in some cases, live off the earnings from the immediate annuity while allowing the tax-deferred annuity to accumulate value for future needs.


How a split funded annuity works


Split funded annuities are composed of two separate annuities created by one initial investment. Essentially, the investor allocates a certain portion of the investment to create an immediate annuity while the remainder is set aside in a deferred annuity with a payout date years or decades in the future. For instance, an initial investment of $100,000 might be split into an immediate annuity of $25,000 and a deferred annuity of $75,000. The $25,000 immediate annuity would pay dividends of $1,250 each year at an interest rate of five percent; this would be combined with a portion of the principal in order to provide additional income for current expenses. In most cases, the immediate annuity is designed to be expended at about the same time that the deferred annuity comes due and begins making payments to the investor. Additionally, the $75,000 deferred annuity would accumulate compounded interest over its duration; this will often provide a significant annual income during the payout period. The earnings of the deferred annuity are, as the name suggests, tax-deferred until they are paid, while the dividends received from the immediate annuity are usually taxable at the time they are received.

Advantages of split funded annuities


Split funded annuities offer immediate payouts while allowing investors to set aside funds for the future; this meets both the short-term and long-term needs of most consumers. The structure of the split funded annuity preserves a significant portion of the principal investment, making it a more secure choice for individuals who must plan for retirement. Additionally, the tax-deferred annuity portion of the investment serves as a hedge against inflation; these longer-term annuities usually accrue compounded interest to outstrip inflation significantly while building value for retirement or payout periods. Finally, split funded annuities offer significant tax benefits to investors, since the earnings on these annuities are tax-deferred until they are distributed. Overall, split funded annuities are an attractive investment for individuals who need a steady stream of supplemental income immediately while still planning for their future retirement needs.
Tim Ord
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