Key Takeaways
- A split-funded annuity uses one payment to purchase two annuities: one immediate and one deferred.
- You can split the premium evenly among the two annuities or put more money into the deferred annuity for maximum returns.
- Split-funded annuities may not be suitable for everyone because of their potential lack of liquidity and surrender periods that can impose withdrawal penalties.
What Is a Split-Funded Annuity?
A split-funded annuity strategy leverages a dual approach — part of the money purchases an immediate annuity while the remaining funds go toward a deferred annuity. This allows you to receive payments from the annuity right away while still collecting tax-deferred payments in the future. Some may call this a split annuity or combination annuity.
The immediate annuity pays out shortly after purchase, typically within a year. In contrast, the deferred annuity pays years after the purchase date. This gives the funds time to accumulate earnings and leads to larger payments.
As Andrew Gosselin, a CPA and former senior tax strategy consultant, told Annuity.org, “In terms of your retirement income strategy, split-funded annuities can play a stellar role.”
“[Having a split-funded annuity] is like baking a cake and eating a slice immediately, while the rest continues to grow and mature, ready to be enjoyed later,” Gosselin said.
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How Does a Split-Funded Annuity Work?
Here is a hypothetical example of how a split-funded annuity might work:
Imagine you have $200,000 in savings. You split it equally, putting $100,000 in an immediate annuity that pays for 10 years. The remaining half goes into a multi-year guaranteed deferred annuity with a guaranteed return of 5%. In 10 years, the immediate annuity has fully paid out, and the deferred annuity has grown to $162,889.46.
For simplicity, this example uses a half-and-half approach to splitting the annuity investment. But it’s also common to divide the savings unevenly, putting more into either the deferred or immediate annuity.
The amount you allocate to each type of annuity can depend on several factors, but you may consider directing more toward the deferred annuity to maximize your growth. You should run various scenarios with your investment advisor to determine the best way to split your annuity in your circumstances.
No matter the allocation, the immediate annuity is making payouts while the deferred annuity is appreciating and replenishing your savings. The typical goal of a split-funded annuity is to allow the deferred annuity to grow enough funds by the time it makes payouts that its balance is equal to your initial investment.
Suppose you took your $200,000 from the previous example and allocated $80,000 to the immediate annuity and $120,000 to the same MYGA with a 5% interest rate. After 10 years, your deferred annuity has grown to $195,467.36, almost equal to your $200,000 principal investment.
In terms of your retirement income strategy, split-funded annuities can play a stellar role.
— Andrew Gosselin, CPA
Who Are Split-Funded Annuities Good For?
The growth potential and diversified income streams make split-funded annuities ideal for retirees. “A split-funded or hybrid annuity is a good strategy for retirement income because it can help retirees plan their finances and diversify their income,” said Mark Stewart, a CPA with Step by Step Business. “The type of investors that are likely to benefit from it are risk-averse investors who have specific income needs.”
Ultimately, you may favor a split-funded annuity over either an immediate or deferred annuity for a variety of reasons. You might value the flexibility of immediate income coupled with the simultaneous growth of your savings. The assurance of multiple income streams that continue paying out for an extended period can also provide peace of mind.
But, despite their many benefits, split-funded annuities may not be right for everyone.
As Gosselin noted, they can be restrictive in terms of liquidity because of surrender periods and withdrawal penalties. “It’s a trade-off between liquidity and stable retirement income, and the ideal choice depends heavily on individual circumstances.”
“The split-funded annuity can be a formidable tool for the right investor: someone near or at retirement, looking for immediate income but also wanting to hedge against inflation and the potential for higher future expenses,” Gosselin said. “The keyword here is ‘right’ — like all financial decisions, the best choice is always the one tailored to individual needs and circumstances.”
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Frequently Asked Questions About Split-Funded Annuities
Split annuities, like all non-qualified annuities, have no contribution limits.
You can divide an existing annuity by withdrawing the contract and creating two new ones. A split-funded annuity is an initial simultaneous purchase, using one payment to fund one immediate and one deferred annuity.
Yes, split annuities typically provide withdrawal options, but the terms and any associated fees or charges may vary based on the contract and the insurance company. It’s important to review the contract carefully to understand the specific withdrawal options available.
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