- Number of payments: Participant chooses the number of payments desired, and the account is paid out in that number of payments. Payments typically are not the same dollar amount due to market fluctuation and are determined as a fraction of the remaining account balance each time a payment is liquidated.
- Dollar election: Participant chooses a flat gross dollar amount and payments are issued until the account balance is depleted.
Weigh your options carefully
So how do I decide what’s best for me? Here are some questions to consider before choosing:
Flexibility. Some qualified plans allow you to start, stop, adjust the gross amount or tax withholding on periodic payments throughout the year, or even take an additional ad hoc payment. Choosing an annuity may lock you into a fixed payment for the remainder of your or your spouse’s life. If you need flexibility, an annuity may not be your best option.
Costs. Nothing in life is free, right? It's the same with retirement income payments. Fees (per payment) can be detrimental and can (and more than likely will) exist in both qualified plans and annuities. It’s worth asking both providers what type of costs you’ll be assessed on both an annual basis for administration and a per payment basis when weighing your options. This may help you determine both the appropriate avenue for payment and the frequency of payment. Oftentimes, leaving your retirement account under your employer’s qualified plan allows your personal assets to remain invested in low-cost investment options at fairly low administrative cost to you. If you do decide to purchase an annuity, beware of additional riders with additional fees that you may incur, such as renewal rate or “management” fees and commissions.
Portability. Substantially equal periodic payments that are made from a qualified plan for a period of less than 10 years are often rollover-eligible. This may mean that if you choose to stop your periodic payments, you may be able to roll your remaining balance to an IRA or other qualified plan to consolidate your accounts. Alternatively, some plans allow you to set up periodic payments that liquidate directly to a rollover institution. This way, if you want to diversify your retirement savings across different investments, you may do so at regular intervals.
Beneficiary impact. Where does the money go if you pass away before it’s gone? If you purchase one of the annuity options outlined previously, it will be very clear what ongoing payments, if any, will continue after your death. However, not often highlighted is the fact that if both you and your spouse or beneficiary pass away before the annuity is fully paid, the insurance company that administers the contract gets to keep the remainder of your contract as income. It does not pass along to any of your relatives or to your estate. One benefit of leaving your money in a qualified retirement plan is that if your money happens to outlive both you and your beneficiary, the money is passed along to the next assignable beneficiary according to the plan document (that is, if your beneficiary did not elect their own beneficiary), meaning your money is not automatically reclaimed by the plan or plan sponsor and your hard-earned money continues to benefit those you love.
Consistent income stream. Both payment options offer a regularly paid income stream following retirement. For most annuities or periodic payments, you can choose to be paid monthly, quarterly, annually, or in a lump sum. The specifics for what is allowed under each annuity or qualified plan, however, will be laid out in the agreement or plan document, so plan to read a bit before choosing the option that is right for you.
Individual tax impact. Be aware that if you initiate substantially equal periodic payments from a qualified plan that span 10 years or more, the administrator or recordkeeper will automatically withhold the mandatory 20% federal taxes from each payment. With both a qualified annuity and periodic payments, you will still be subject to required minimum distribution (RMD) requirements once you reach age 72. The RMD may result in an additional payment from the plan beyond your regularly scheduled payments, if necessary.
Returns. Guaranteed versus variable returns and hypothetical illustrations—it’s a lot to take in. Keep in mind that hypothetical illustrations offered by an annuity are just that—hypothetical, and oftentimes reflect best-case scenarios. Make sure you’re inquiring about the assumptions used to generate the illustration before relying on it, and determine whether it may be too good to be true. If a fixed period annuity is purchased, you are guaranteed the fixed amount for a definite number of payments, which are not subject to market volatility. On the other hand, choosing a variable annuity or leaving the account invested in a qualified plan and subject to market volatility could yield dramatically different results.
Scenario 1: Participant elects a total number of 100 installment payments. Each time a payment is made, the account is divided by the remaining number of payments and liquidated. The amount per payment could vary drastically.
| Payment 1 | Payment 2 | Payment 3 | |
| Market Value on Payment Date | $ 1,000,000.00 | $ 1,100,000.00 | $ 880,000.00 |
| Remaining Number of Payments | 100 | 99 | 98 |
| Payment Liquidated | $ 10,000.00 | $ 11,111.11 | $ 8,979.59 |
Scenario 2: Participant elects gross payments of $10,000. If the market does well, the participant will receive more than 100 payments, but if the market doesn’t do well, the participant will receive fewer than 100 payments and only time will tell.
| Payment 1 | Payment 2 | Payment 3 | |
| Market Value on Payment Date | $ 1,000,000.00 | $ 1,100,000.00 | $ 880,000.00 |
| Estimated Remaining Number of Payments | 100 | 110 | 88 |
| Payment Liquidated | $ 10,000.00 | $ 10,000.00 | $ 10,000.00 |
