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InvestHub.com's
Finance Dictionary and Glossary of Investment Terms

Annuity, Split  

Definition 1.

An annuity contract where the principal investment is split between a deferred annuity and an immediate annuity. A split annuity can help you increase the after-tax earnings from other fixed-rate investments you have made, such as a certificate of deposit.Say you have a $100,000 certificate of deposit that earns 7 percent and that you are in the 30 percent income tax bracket. The CD would generate about $4,900 of after-tax income. In 10 years, you will have received $49,000 of after-tax income and will still have $100,000 in principal. According to "Wealth Enhancement & Preservation", a Web-based database created by Robert A. Esperti and Renno L. Peterson for the National Network of Estate Planners, you could collect more than $49,000 in after-tax income by purchasing a split annuity. "The $100,000 in principal could be divided for investment purposes between a deferred annuity and an immediate annuity. If approximately $50,000 is put into an immediate annuity at 7 percent, it will provide $6,200 of annual after-tax income for a period of 10 years. This includes a return of principal and interest. After 10 years, the annuity will end. The other $50,000 would be invested in a single-premium deferred annuity. At 7 percent per year, this amount will grow back to the original $100,000, and the process can be started all over."Before you rush out to purchase a split annuity, there are a few issues you need to consider. For one, annuities aren''t as liquid as CDs. They also involve higher surrender charges. And unlike most CDs, the federal government doesn''t insure annuities.It''s also important to remember that annuities have different estate and income tax implications at death than CDs do. And if interest rates are low, you might have to choose an annuity that has a variable rate rather than a fixed-rate -- a selection that may result in higher returns but will also increase your risk.
 
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