If you have an annuity and have short-term funding needs, you may want to consider annuity financing. This is the process of taking a loan directly from the annuity or using its value as collateral for a loan from an outside source.
Why Consider Annuity Financing?
There are a couple of reasons you might want to consider annuity financing, including:
- Emergency needs such as a down payment on a home, supporting a family member, home repairs, or medical expenses
- You don’t want to give up your annuity due to tax and surrender penalties that would lower its value
How Does Annuity Financing Work?
Before we explain how annuity financing works, we’ll explain the basics of deferred and non-qualified annuities.
A deferred annuity has an accumulation period in which it grows. At the end of this period, you can annuitize it, which converts it to an immediate annuity. This is when your payments start. This type of annuity can only be used for a loan during the accumulation period.
A non-qualified annuity is funded with post-tax dollars, while a qualified annuity is funded with pre-tax dollars. You may be able to borrow money during the accumulation phase on your non-qualified annuity. However, financing with a qualified annuity may be more complex.
Here are your financing options:
- Take a loan directly from the annuity
- Use the annuity as collateral
Advantages & Disadvantages of Using Your Annuity for a Loan
Annuity financing has several advantages and disadvantages, which we will explore below:
Advantages
The advantages of annuity financing are:
- Annuity financing allows you to avoid surrender charges. If you surrender a portion or all of the annuity for cash, you’ll be required to pay a fine. In some cases, these may cancel out any gains you’ve accrued.
- Annuity financing allows you to avoid paying taxes and early distribution penalties. If you liquidate an annuity before you are 59.5 years old, you’ll be charged a 10% penalty on the amount that you withdraw.
Disadvantages
The disadvantages of annuity financing are:
- You may have to pay an early distribution penalty if you do not pay it back within the specified period of time. In addition, the amount withdrawn is subject to income tax by the federal government.
- You reduce the amount that is available to earn interest, which reduces the growth of the annuity.
- There are certain restrictions, which means this may not be the best use of your tax-deferred status.
Is Annuity Financing a Good Idea?
As a general rule, using your annuity for financing, selling it for a fraction of its worth, or surrendering it are the last resort. If possible, its best to have emergency funds set aside in flexible products such as an online savings account. You may also want to consider meeting with a tax advisor or other financial professional to discuss your goals and get some advice. If you need help, contact the experts at Abundant Wealth Financial. We can help you examine your options to get the funds you need.