The use of split annuities is a tax-efficient retirement planning technique using two types of annuities to provide an annual, fixed monthly income for a specified period of time, while renewing itself within the same specified period of time.
Here's how it works. A split annuity is a combination of a Single Premium Immediate Annuity (SPIA) and a Single Premium Tax-Deferred Annuity (SPDA), fixed or variable. The SPIA provides immediate income for a guaranteed period while the SPDA continues to grow at interest, leaving the client with his or her original principal at the end of that period. This lets the client restart the process at prevailing interest rates, while money in the SPDA is accessible for emergencies with limitations.
Tax Advantages
The portion of the SPIA income representing return of the investor's principal is tax-free, while the SPDA offers tax-deferred growth, and the investor earns interest at a rate typically higher than average CD rates.
Issue ages are typically zero to 85 for non-qualified funds and zero to 70 for qualified funds, with the immediate income periods of three to 20 years.
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