Split annuities combine a single premium immediate annuity (SPIA) with a deferred annuity. Typically the total amount invested is split so that the amount invested in the deferred annuity will grow back to the total amount, during the time period the SPIA is producing income. This concept is designed to maximize your clients’ after-tax income. The income produced by the SPIA is tax favored in that a large portion of the income is considered return of premium and not taxable.
For example: $100,000 total to invest. $78,500 goes into a deferred annuity. At 5% yield, the $78,500 will grow back to $100,000 in 5 years. The remainder, $21,500, will produce $359.47/mo. for 5 years. $358.32 is considered return of premium and is not taxable. In this example, using the lowest interest rates in recent history, the client receives a net after-tax effective rate of return in excess of 4.3%. At the end of the 5 years the client has their $100,000.
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