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The Individual Retirement Annuity Plan

Money Manager | Monday, October 4th, 2010

Individual retirement annuity plans are set up so that they share many structural similarities with a regular individual retirement plan (IRA). However, in the case of an individual retirement annuity plan, there are certain conditions that have to be met and an annuity contract has to be purchased. Individual retirement annuity plans have to be issued in the name of the owner. Additionally, the only individuals who are qualified to receive the benefits are the annuity owner themselves as well as their surviving beneficiaries. However, individuals other than the primary holder of the individual retirement annuity plan can make annuity payments. Although there are a number of requirements to these plans which must be met, overall they can be an effective retirement plan.

How do I set up an individual retirement annuity plan?

Individual retirement annuity plans can be set up by purchasing an endowment contract or an annuity. These can be purchased from insurance companies. The annuity is required to be issued in the person’s name as the owner. Beneficiaries can also be set up so that they can receive the payments or benefits as the owner’s survivors.

Are there multiple kinds of annuity plans?

Annuity plans can be set up as a fixed or a variable annuity. A fixed annuity allows the accumulation of earnings at a fixed rate. The required premium is paid, either in installments or a lump sum. The insurance company then invests the assets, so that the promised rate of return can be paid. At retirement age, an annuity account can be converted into retirement income. You can choose to receive a set amount in equal payments over your lifetime, or over the lifetime of you and another person, who is referred to as a joint annuitant. Variable annuities allow the premiums paid to be allocated to multiple account funds. Just as with a fixed annuity, these plans can provide a steady stream of retirement income for the rest of the person’s life. However, if withdrawals are taken from annuity plans before retirement age, the withdrawal may be subject to a 10% penalty.

What are the requirements for setting up an individual retirement annuity plan?

The contract for the annuity plan must be set up so that the owner of the plan cannot transfer the entire plan, or any portion of it, to anyone other than the issuer. The owner’s interest in the contract is required to be non-forfeitable. There must be a provision that allows the premiums to be flexible. This will allow payments to change if your compensation also changes. Contributions cannot exceed the yearly deductible amount for an IRA. If a refund of premiums is received, they must be used to buy more benefits before the end of the next year, or to pay for premiums in the future. Once the owner reaches the age of 70-1/2, distributions must begin by April 1 of the following year. There are also special rules that must be followed when calculating the required minimum distribution for an individual retirement annuity plan.

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