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What Is Single Premium Deferred Annuity (spda)?

A single premium deferred annuity, or SPDA, is a fixed annuity that you buy with a single premium

. You get a guranteed interest rate for a specified period of time, and the taxes on the interest you earn are deferred until you make a withdrawal.

Who would want to buy an SPDA?

Anyone who wants to let his or her money grow risk-free while deferring income taxes on the earings portion of his or her account, with the goal of creating income later in life, may choose an SPDA. Many people enjoy the idea of a fixed interest rate that will remain in effect for a specific period of time, typically from one to seven years. In most cases, the longer the gurantee, the lower the interest rate. This type of annuity is most easily compared to a certificate of deposit at a bank. In both cases, you get a guranteed rate for a prescribed period. In an annuity, you incur surrender charges if you take your money out, and in a CD you are faced with a three to six month early-withdrawal penalty. The difference, however, is that with a certificate of deposit, you will be paying taxes each year on the interest you earn, even if you don't withdraw it. With the SPDA, you will nor pay taxes until you make a withdrawal.

You might consider an SPDA if:

Your goal is to invest money with minimal risk and you are attracted to vehicles such as CDs and Treasuries; and

You know you are not going to need any of the money you're investing until after age 59.5 and

You do not need current income but will need income sometime after age 59.5 and will be in an equal or lower tax bracket; or

You are already 59.5 and older, you need current income, and the SPDA you are considering offers a guranteed five-year interest rate that is higher than the interest on five-year CDs and Treasuries.

In summary, there is one set of circumstances in which I would definitely advise you to consider an SPDA. If your goal is to have income during your retirement years, but you don't want to take any market risk with your capital, and you want to avoid paying taxes now but are not in a high enough tax bracket for municipal bonds to make sense, and you believe that you will be in a lower tax bracket when you entire, then an SPDA may be a great investment, regardless of your age.

I also recommend an SPDA when someone is under age 59.5 and needs to take SEPPs, substantially equal periodic payments, for income (payments you can take without paying a 10 percent IRS penalty tax).

What should I watch out for when shopping for an SPDA?

You should check to be sure the insurance company issuing the annuity is safe. And this is very important, ask about the interest rate being offered, the period of time during which the interest rate will be guranteed, and the surrender period stipulated by the contract. Ideally, the interest rate should be good one, and the period for which the rate is guranteed should be at least as long as the surrender period. (In other words, if the interest rate is 7 percent and the contract has a five-year surrneder period, the company should pay you 7 percent for all five years.) If you are offered an attractive interest rate for a guranteed one-year period but the surrender period goes on for seven years, please be wary. Even if the first-year rate is outstanding, in the absence of a longer gurantee you are taking a big risk as to what the interest rate will be for the second year, the third year, and so on. Many companies sucker you in with a good first-year rate and then lower it considerably in the remaining years. Finally, ask how the company sets its renewal interest rate, if applicable, or do some checking on your own. That way you know exactly what you are getting.

How can I check on a company's renewal rates?

Ask to see the history of renewal rates for older SPDA policies that the company has in force. If the company tends to lower the interest rates on policies as they get older, chances are good it will reduce yours, too. Make sure you compare the company's renewal rates in previous years to the rate on Treasuries and CDs for the same years. The way, you'll know whether it make sense for you to purchase a particular SPDA.

Can I annuitize my SPDA?

Yes, although it might not be wise to do so. Insurance companies that offer annuities tend to use different annuitization factors when annuitizing--that is, when calculating how much to pay on a monthly basis over your life span. If you're looking for income from an annuity, it would be best to find out which companies are offering the best annuitization rates and/or to buy outright an immediate, or income, annuity. Typically, the annuitization rates offered by SPDA contracts are not as advantageous as those offered by immediate annuity contracts, and even immediate annuity rates vary from company to company.

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