The split-funded annuity approach combines the advantages of a Single Premium Immediate Annuity (SPIA) with those provided by a Single Premium Deferred Annuity (SPDA) for someone who needs to receive income from a lump-sum. Typically, split-funded annuity prospects are individuals who are currently receiving income from a CD – income that is being fully taxed.
The best way to explain a split-funded annuity is with an example. Let's suppose that you have a client with $100,000 who needs to receive income from that money. Your client is considering placing the $100,000 in a CD that guarantees 7 percent interest for five years, or $7,000 per year. Because your client is in a 28 percent tax bracket, the net income from the CD after tax is only $5,040. If you propose a split-funded annuity offering the same interest rate, your client's net after-tax income could increase by as much as 25 percent to $6,324! In addition, your client could still have the original $100,000 available after five years, just as with the CD.
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