A fixed indexed annuity can be turned into income in more than one way. You can withdraw from the account and reduce the cash value. You can annuitize, which means you convert value into a stream of payments under the contract’s settlement options. Or you can add a rider — often a guaranteed lifetime withdrawal benefit, or GLWB — that charges an extra cost and can continue income after the account value has fallen to zero. The NAIC Buyer’s Guide is the source for that distinction. It does not publish a standard rider fee. This site will not invent one.

The account value and the income base are not twins

Sales illustrations for riders often show two numbers. One is the account, or contract, value. That is closer to the amount surrender charges, market-value adjustments, and free-withdrawal rules act on. The other is an income base, benefit base, or similar label used only to calculate the rider’s withdrawal. The income base can be larger than the account value because the rider’s formula increased it. You generally cannot withdraw the income base as a lump sum. If someone says the contract is “worth” the income-base figure, ask whether a surrender check would be for that figure. If the answer is no, the word “worth” is doing sales work.

The NAIC guide’s point is the one to keep: lifetime income that continues after the account is empty is not the same thing as cash surrender value. When the account is zero and the rider is still paying, you have income, not a balance you can roll to another company. Ending the rider or surrendering what is left, if anything is left, stops that income. Read the termination clause before you think of the rider as a pension you can also cash in.

What the extra cost buys, in words and not in a percentage

The cost is real even though this page will not name a percent. It might be deducted from the account each year. A deduction reduces the value that later index credits are calculated on, and it reduces what is left if you surrender. A year in which the index credit is zero can still be a year in which the rider charge comes out. The charge is not a reason to avoid every rider, and it is not a reason to buy one. It is a reason to ask how the charge is computed, whether it can rise, and what income you are paying it to protect.

The income, once it starts, is limited by the rider’s percentage and by the rules for excess withdrawals. This site will not quote a withdrawal percentage such as 5 percent, because that number is a product feature and not a constant. Ask what percentage applies at the age you would start, whether the percentage is higher if you wait, and what happens if you take more than the allowed amount in a year. Contracts commonly reduce future guaranteed income when you exceed the allowed withdrawal. Confirm that in the form you are signing rather than relying on the word “commonly.”

Annuitization is a different door

Annuitizing means you use the contract’s annuity options. In exchange for payments, you generally give up the right to surrender the same dollars later. A life option depends on a measuring life. A period-certain option pays for a stated number of years. Joint options cover two lives. The size of the payment depends on the option, the rates in the contract, and the value being annuitized. There is no national payout rate for a fixed indexed annuity, and a rider’s illustrated income is not the annuitization quote. Ask for both numbers if both are available. They answer different questions: “What does the rider let me withdraw while keeping the contract in force?” and “What monthly amount would the insurer pay if I annuitize?”

Timing, taxes, and required distributions

Starting income does not, by itself, tell you the tax result. Withdrawals of gain from a nonqualified annuity are generally ordinary income. Amounts from a nonqualified contract that are not received as an annuity are generally treated as income first, which is the point of Revenue Ruling 2007-24, discussed on the tax page. If you are under 59½, an additional 10 percent tax may apply to the taxable portion unless an exception applies. IRS Topic 410 is the overview. This site points you to Publication 575 and the Form 5329 instructions instead of listing every exception. One exception you should not copy onto a nonqualified annuity is the workplace-plan rule about separation from service. Topic 410 is about pensions and annuities in a broad sense; not every exception on that page is available for a nonqualified fixed indexed annuity.

If the contract sits inside a traditional IRA, required minimum distributions still exist. The IRS page on required minimum distributions says you generally must start taking withdrawals from a traditional IRA when you reach age 73. A rider’s preferred start age does not repeal that. Roth IRA owners are not required to take those distributions during their own lives. An income rider does not change which kind of IRA you have.

A rider is optional

You can own a fixed indexed annuity with no income rider. You then have the account value, the index formula, the surrender schedule, and the contract’s built-in annuitization options. Adding a rider is a purchase inside the purchase. Compare the income you are shown with the income you would get by annuitizing later, and with the income you could take by systematic withdrawals without a guarantee. The rider’s distinctive piece is the guarantee that payments can continue after the account is exhausted, subject to the rider’s rules and the insurer’s ability to pay. If you do not value that piece, the charge is buying something you may not need. If you do value it, the charge is the price of transferring longevity risk — the risk of living a long time — to the insurer, within the limits of that insurer’s promise.

No page on this site can say the transfer is worth it. That depends on your other income, your savings, and how the specific form calculates the benefit. Use questions to ask and take the rider specimen, not the brochure, to the meeting.

Sources

Not advice. IndexedAnnuity.com is not an insurance company, agency, broker-dealer, or tax advisor. Nothing here is a recommendation to buy, hold, or replace a contract. Guarantees exist only in a specific contract and depend on the insurer’s ability to pay. Products and state laws differ. Read the contract.
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