The process of annuitizing an IRA proves something of an enigma to many, not least of all because the word "annuitizing" appears in few dictionaries. An annuity constitutes a payment made on a regular basis at a constant amount. Annuitizing an IRA is the process of converting the money in an individual retirement account (IRA) to a series of regular payments. The benefits of annuitization include tax breaks and increased financial security.
Annuitizing Your IRA
Annuitizing an IRA occurs when you convert the lump sum in your IRA to a series of regular payments. These payments come each month in the same amount for a predetermined period of time. The length of your annuity depends upon your life expectancy as determined by the IRS. For instance, assume the IRS predicts you live for another 25 years, and you hold $750,000 in your IRA. You receive $30,000 (750,000/25) annually each year for 25 years, or an annuity of $2500 (30,000/12) per month.
Early Account Access
As per federal law, you many only withdraw money from an IRA upon reaching age 59 1/2. The federal government applies a 10 percent penalty tax to any money withdrawn from an IRA before you reach the required age. Annuitizing your IRA allows you to circumvent this law; you can begin receiving annuity payments from your account before reaching 59 and 1/2, without paying the 10 percent tax on withdrawals.
Annuitizing your IRA affects how you manage your money. For the average person, annuity helps monitor expenditure and prevents against the loss of funds through spontaneous decisions or other large expenditures. If you annuitize the full amount of your IRA and wish to make large purchases or investments, you must save a portion of each monthly payment. Annuitizing also allows the option of apportioning a certain amount of IRA funds to annuity, and saving the rest in the IRA. With this method, you can combine regular payments with a sum of disposable income.
Annuitizing an IRA protects annuitized funds from financial instability. Upon annuitizing an IRA, all the annuitized funds are earmarked specifically for annuity payments and left untouched in an account that automatically makes those payments. This money remains unaffected by changes to financial markets -- meaning that, regardless of world's economic situation, you continue receiving your payments until you die or the annuity expires. An IRA proves more susceptible to market fluctuations than annuity payments. Furthermore, direct access to all funds may lead to investments that drastically decrease in value, which small, regular payments protect against.
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