Posted on March 4, 2010.
What single premium deferred annuity (SPDA)? A single premium deferred annuity, or SPDA is a fixed annuity you buy with a single premium. You get a guaranteed interest rate for a period of time, and taxes on the interest you earn is deferred until you withdraw.
Who would buy an SPDA?
Anyone who wants to let her money grow safely while deferring income taxes on the portion earrings from his account, in order to create an income in later life, can choose an SPDA. Many people like the idea of a fixed interest rate which will remain in force for a period of time, usually one to seven years. In most cases, more security, lower interest rates. This type of annuity is easier compared to a certificate of deposit in a bank. In both cases, you get a guaranteed rate for a specified period. In an annuity, you incur a redemption fee if you withdraw your money in a CD and you face a sentence of three to six months in early withdrawal. The difference, however, is that with a certificate of deposit, you pay taxes every year on the interest you earn, even if you do not remove it. With SPDA, you do not pay taxes until you make a withdrawal.
You might consider a SPDA if:
- Your goal is to invest money with minimal risk and that you are attracted to vehicles such as CDs and Treasury bills, and
- You know you do not need all the money you invest after the age of 59.5 and
- You do not need current income but may need an income after the age of 59.5 and will be equal or lower tax bracket, or
- You are already 59.5 and over, you need current income and SPDA you are considering offers a guaranteed interest rate for five years which is higher than the interest on five CDs and treasuries.
In summary, there is a set of circumstances in which I really advise you to consider a SPDA. If your goal is to have an income during your retirement but you do not want to take market risk with your capital and want to avoid paying taxes now, but not in a tax bracket high enough for municipal bonds to make sense, and you think you are in a lower tax bracket when you set, then a single premium deferred annuity can be an excellent investment, whatever your age.
I also recommend an SPDA when someone is under 59.5 and shall take SEPP, substantially equal periodic payments for income (payments, you can take without paying a penalty tax of 10 percent IRS).
What should I look for when shopping for an SPDA?
You should check to be sure the insurance company issuing the annuity is safe. And this is very important to ask about the interest rate offered, the time period during which the interest rate will be guaranteed, and the period of assignment under the contract. Ideally, the interest rate should be good, and the period for which the rate is guaranteed to be at least as long as the period of assignment. (In other words, if the interest rate is 7 percent and the contract has a term of five years surrneder, the company must pay you 7 percent for five years.) If you are offered a rate Attractive interest for a one year warranty period, but the period of assignment continues for seven years, please be careful. Even if the rate of first year is exceptional, in the absence of a guarantee plus you take a big risk that the interest rate will be for the second year, third year, and so on. Many companies you sucker with a good rate of first year, then lower it dramatically in the remaining years. Finally, ask how the games.
