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Immediate vs. deferred annuities

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Immediate annuities Deferred annuities
Payout begins shortly after the premium is paid. Payout begins at some specified future date, allowing time for accumulation.
Purchase with a single premium. Purchase with either a single premium or periodic premiums.
Contract is usually irrevocable--after you enter into the contract, it can't be changed. Contract can be surrendered or exchanged for another annuity (Section 1035 exchange).
Assets do not accumulate on a tax-deferred basis. They are distributed using a predetermined formula, such as for life, for a fixed period, in a fixed amount, and so on. Assets accumulate on a tax-deferred basis. When distributions begin, they are made using a predetermined formula, such as for life, for a fixed period, in a fixed amount, and so on.
Each distribution is part tax-free return of premium and part ordinary income, depending on age and the distribution method. Distributions are first made from any gains/ interest earned and taxed at ordinary income tax rates; tax-free return of premium is distributed last.
No tax penalty on lifetime payments started before age 59½. 1 A 10 percent nondeductible tax penalty is assessed on the gains (or interest) withdrawn or annuitized before the annuitant reaches age 59½, unless an exception applies.
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Notes:

1 Unless the immediate annuity is purchased with proceeds from a deferred annuity.