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As you approach retirement, you will be faced with the need for a secure source of income. If you are looking toward retirement, you may want to consider annuities as an integral part of your financial plan.

An annuity is a contract between an individual and an insurance company that provides the individual with tax-deferred accumulation and an option to receive a lump sum or fixed periodic payments starting on a specific date.

An annuity can offer benefits such as:
  • Tax-deferred growth.
  • No required distributions at age 70½. This means that your money can continue to grow tax-deferred over a longer period of time.
  • Control over when you pay taxes by timing distributions.
  • Unlimited contributions.
  • Option of guaranteed income for life.
  • Guaranteed fixed rate of return for a fixed annuity.
  • A death benefit that passes account value to beneficiaries, which may avoid probate, but is not tax-free.
Tax-Deferred Accumulation
If owned by an individual, all earnings in an annuity are free of current federal, state, and local income taxes until you start receiving annual payments. This enables all earned annuity income to compound without being reduced by current income taxes. Withdrawals of earnings are subject to ordinary income tax, and a 10% federal income tax penalty may apply if you take the distribution before you reach age 59½.

Accessing Annuity Income
Although a deferred annuity should be considered a long-term growth vehicle, it does give you access to your money when you need it. (Insurance company surrender charges may apply.) You decide how to access funds from an annuity. You can make withdrawals, receive a lump sum payment or annuitize your annuity and receive monthly payments for your lifetime.

Distributions from a deferred annuity on a non-annuitized basis are withdrawals of earnings first, and therefore taxable. Withdrawals exceeding earnings are considered a tax-free return of principal. This option keeps your money growing tax-deferred while allowing you to draw income. Since you determine the amount of the distributions, you control when and how much taxes you will pay. However, since you are making withdrawals and are not annuitizing the policy, the withdrawals are taxed as earnings first until all the earnings have been withdrawn.

If you choose to receive a lump sum distribution, you will receive the entire value of the contract. This option may be the least effective from a tax standpoint. You bear tax liability for all of your earnings in a single year, which may push you into a higher tax bracket and increase your tax bill. In addition, you have also lost the benefit of continued tax-deferred growth. If you choose a lifetime annuity option, you will receive annuity payments that are taxed according to a concept known as the exclusion ratio. Each payment consists of a partial payment of interest, subject to ordinary income tax, and a partial payment of your principal, tax-free, until all of your principal has been returned.

A federal income tax penalty of 10% is imposed on early withdrawals of earnings from an annuity. However, certain exceptions may apply. For example, the penalty will not apply to a distribution that is:
  • Made at the time, or after, the taxpayer attains the age of 59½.
  • Made to a beneficiary upon death of the owner, or in the case of an entity owned contract, upon the death of the primary annuitant
  • Made as a result of the taxpayer's becoming disabled.
  • Part of a series of substantially equal periodic payments that are made for life.
With annuities, there are additional tax considerations you should be aware of. If you want to transfer an annuity to another person, ask about gift and income tax consequences. Finally, if you are buying an annuity for a trust, corporation, or partnership, be aware of the tax effect of Internal Revenue Code Section 72(u). If you want to buy more than one annuity, ask about "aggregation." If you want to move money from one annuity to another, consider a Section 1035 exchange to protect your money from the loss of certain tax advantages.

Avoidance of Probate
In the event of death, the proceeds of an annuity go directly to your specified beneficiary, thereby avoiding the costs, delays, and publicity associated with probate. Although the death benefit avoids probate if payable to a named beneficiary, the value of the annuity is generally included in the decedent's estate for estate tax valuation purposes. When an individual is named as beneficiary, the beneficiary may be subject to ordinary income tax on the earnings portion of the proceeds.

Consult your Prudential licensed financial professional to determine if annuities suit your financial needs.
Annuities are issued by The Prudential Insurance Company of America, Newark, NJ, a Prudential Financial company. Like most annuities contracts, our contacts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. All guarantees are based on the claims paying ability of the issuer. Your Prudential financial professional can provide you with costs and complete details. Each Prudential Financial company is solely responsible for its own financial condition and contractual obligations.