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Planning your financial future can be empowering. It’s about ensuring security for yourself and your loved ones, no matter what life brings.
For many, a joint and survivor annuity offers a practical and reassuring solution, providing a steady income stream for you and someone who matters deeply to you — even in your absence.
Read on to learn how these annuities work and discover their pros and cons. Understand critical IRS rules and tax implications to make informed decisions about your financial goals.
Joint & Survivor Annuities: Definition & how they work
A joint and survivor annuity is a contract between you and an insurance company guaranteeing regular payments for you and one other person. It ensures the surviving individual continues receiving payments after the other person passes away. You don’t have to be married to qualify — any two people can take advantage of this type of annuity.
Because joint and survivor annuities pay out longer than a single life annuity, they typically offer lower monthly payments. Your monthly payments depend on how much you contribute and the ages of both individuals.
You’ll pay a small percentage of the annuity's value in fees and may encounter restrictions when accessing additional funds. In employer-sponsored retirement plans, this is often the default option for married couples. In those cases, the surviving spouse gets between 50% and 100% of the original benefit.
How does a joint and survivor annuity work?
A joint and survivor annuity begins with an initial deposit, either as a lump sum or through regular contributions. The insurance company then calculates monthly payments based on the following factors:
- Your life expectancies.
- The survivor benefit percentage you choose.
- The initial contribution amount.
- Interest rates.
As the primary annuitant, you'll receive regular payments for the rest of your life. What makes this type of annuity unique is that it keeps paying even after the first annuitant passes away. The amount the surviving annuitant receives depends on the option you choose when you buy the annuity:
- 100% joint and survivor annuity: The survivor gets the full payment amount.
- 75% joint and survivor annuity: Payments drop to 75% of the original amount.
- 50% joint and survivor annuity: The survivor receives half of the original amount.
The higher the survivor benefit percentage you select, the lower your initial monthly payments, as the insurance company spreads the risk over a longer payout period. And you'll likely have smaller monthly payments if you're younger because the company expects you to pay longer.
Hypothetically, if you contribute $100,000 in a 100% joint and survivor annuity, and your monthly payments start at $400. After one of you passes away, the survivor will still receive $400 monthly.
Hypothetically, if you choose the 50% option, your initial joint and survivor annuity payouts could increase to $450. However, after one person’s death, the survivor’s payments would drop to $225.
Choosing the right option means balancing your need for higher payments now with long-term security for the survivor.
Joint and survivor annuity pros
Choosing an annuity gives you a dependable path to security, offering consistency and reassurance. Here’s an overview of this annuity’s benefits and how it might fit into your financial strategy.
1. Financial security
A joint and survivor annuity keeps you and your partner financially secure with a steady income, even if one of you passes away. It helps you avoid outliving your savings, manage unexpected costs, and stay stable during life’s changes. It’s a forward-thinking choice for building a confident future together.
2. Lifetime income
With payments lasting as long as you or your partner lives, you can plan confidently, knowing your income is consistent. It can also bridge financial gaps while waiting to claim Social Security. Itcan be right for couples who prefer reliable income over higher, unpredictable returns.
3. Tax benefits
Tax benefits make joint and survivor annuities even more attractive. Your contribution grows tax-deferred, meaning you won’t owe annuity taxes until you make withdrawals. If you fund your annuity through a 401(k) or IRA, the contributions and earnings are taxed as regular income when you take the money out. But with non-qualified annuities funded with after-tax dollars, only the gains are taxable, giving you more flexibility and control.
Joint and survivor annuity cons
Despite their long-term stability, here are some potential drawbacks of this annuity type.
1. Inflation risk
With joint and survivor annuities, your payments stay the same over time, which means inflation can gradually reduce your purchasing power. As the cost of living rises, your fixed income might not be enough to cover your living expenses. Customize your annuity with an inflation rider to protect it from inflation.
2. Opportunity cost
Choosing a joint and survivor annuity is a long-term commitment that can be difficult to adjust to. Early withdrawals often incur penalties, and the limited flexibility may prevent you from pursuing better growth opportunities, which is called opportunity cost.
3. Fees and costs
Choosing a joint and survivor annuity isn’t the best fit for everyone. These annuities often start with lower payments and higher fees, meaning smaller returns over time. And if your partner passes away, the payments you receive might not cover your living expenses unless you include riders — but keep in mind, those extras can add to the cost. It’s important to weigh the pros and cons and choose what works best for your situation.
IRS rules for joint and survivor annuities
The IRS has clear guidelines for joint and survivor annuities, and you need to understand them to make wise decisions about your retirement plan. Here’s what you should know:
- Minimum distribution rules: The IRS requires withdrawals from retirement accounts starting at age 73 — unless you're still employed. Non-spouse beneficiaries must take the required minimum distributions (RMDs) based on their life expectancy. They can’t roll over the inherited account. Still, they can use the "stretch IRA" option to take distributions over their lifetime or withdraw the entire balance within 10 years.
- Payments within tax-qualified retirement plans: A survivor's portion of the annuity must be between 50% and 100% of the amount paid during the participant's lifetime. The plan can pay the entire lump sum without consent if the benefit is less than $5,000.
- Tax: Tax treatment of an annuity varies by funding source. If you fund the annuity with a traditional 401(k) or IRA, you pay ordinary income tax on earnings. And if you fund the annuity with after-tax dollars, you only pay tax on the gains. Surviving members must include these benefits in their gross income under the same rules as the retiree.
This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.
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