Annuitizing an IRA

What is annuitizing an IRA?

Annuitizing an individual retirement account (IRA) is a process that allows a saver to take money out of an IRA account without paying tax penalties prior to the full retirement age of 59 ½ years. When an IRA is annuitized, equal monthly payments are dispersed to the holder based on her estimated life expectancy.

Deeper definition

An annuity is a regularly scheduled payment disbursed over a set period. By annuitizing his IRA, an individual can begin receiving payments from his account prior to the qualifying age, which is 59 1/2. Normally, individuals who withdraw from these accounts prior to the retirement age will face a tax penalty for doing so, but annuitizing an IRA circumvents that penalty.

The process of annuitizing an IRA involves converting an investment into a series of periodic, equal payments based on the account holder’s life expectancy. The balance is divided by the amount of time the Internal Revenue Service expects the account holder to live, which sets a predetermined payment that will remain the same until the value of the IRA is depleted.

Additionally, it’s possible to partially annuitize an IRA, so that regular payments can be made out of one portion while the other portion remains untouched.

Don’t have an IRA yet but want to start saving? Check out these savings account options.

Annuitizing an IRA example

Ellen needs to gain access to her IRA. She decides to annuitize the IRA so she can receive annual payments. The IRA holds $700,000 and she is expected to live for another 20 years. This means she’ll receive $35,000 a year.