If you plan to use your individual retirement account to provide a portion of your retirement income, the option to annuitize all or a portion of your IRA is one way to convert the IRA's value in the account to monthly income. Although it is not a commonly used option with IRAs, the choice to annuitize does provide some advantages.
Buying an Income Stream
To annuitize an IRA, you will use the accumulated value -- or a part of the value -- to buy an immediate annuity from a life insurance company. In return, the insurance company will pay you a monthly payment for as long as you live. One option with an annuity is to add a spouse as a joint lfe or co-annuitant, and the payments will last until the second person dies. When you die -- or the second person dies in the case of a joint life annuity -- the annuity payments stop and there is no remaining value from the IRA money you used to buy the annuity.
Never Run Out of Income
The major advantage of buying an annuity with your IRA money is that the monthly payments are guaranteed to last as long as you live. If you leave your IRA as a lump sum and make annual withdrawals, there is a possibility the account will either run out of money or you will be forced to reduce the amount of withdrawals if you live too long. The possibility exists with a self-directed IRA that you will outlive the money in the account. If you choose to annuitize the IRA value, you have a guarantee to never outlive your IRA income. The monthly income from an annuity will last as long as you do.
Enhance Financial Planning Tactics
The guaranteed income stream from an annuitized IRA can be used for other financial planning strategies. If you want to leave a large inheritance for your heirs, the annuity payments could be used to buy a life insurance policy, multiplying the value of the IRA several times. Another option would be to use the annuity payments to pay for a long-term care policy providing financial protection for your later retirement years. The guaranteed income provided by an annuity allows you to use that money to commit to financial planning goals that require regular payments.
Annuitizing a portion of an IRA account provides flexibility plus a stable income. For example, you have determined you need $1,000 per month from your IRA to provide the extra income you need above your pension and Social Security. You can annuitize enough of the IRA to provide the $1,000 worth of income and leave the balance of the IRA to grow tax-deferred. The non-annuitized IRA amount remains available to pay for future expenses or to provide more income in your later retirement years.
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