Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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What is an annuity accumulation phase?

The annuity accumulation phase is the period where the policy holder (the annuitant) makes contributions to the account. Once this phase ends, the annuitant starts making withdrawals from his or her annuity account in the distribution phase.

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The payments can be made annually, quarterly or monthly, either for a set period of time or for life, depending on the annuity contract. Be sure to understand how an annuity works before committing to one.

What is an Annuity?

An annuity is a type of financial product offered by insurance companies. The annuitant makes deposits into his or her annuity account. He or she may be able to direct that the funds be invested in specific financial vehicles, such as mutual funds, bonds or stocks.

There are different types of annuities:

  • Deferred- The accumulation phase is part of a deferred annuity. This is one where there is a gap between the time the money is deposited in the plan and it is withdrawn. An immediate annuity starts paying out funds right away, and is an option for people who are at or near retirement age who want to have a regular source of income during this time of their life. The insurance company may offer an annuity that guarantees a minimum return on the investment.
  • Variable- An annuitant can also choose to buy a variable annuity, where the return rises and falls with changes in the investment market. The second type does offer the potential for greater returns than a fixed rate one does, but it also requires that the annuitant accept a higher level of risk.

In the accumulations phase, the annuitant can usually transfer funds from one type of investment to another within the plan without having to pay capital gains tax. The insurer may charge administrative fees for doing so, though. The funds grow tax-free within the plan until they are withdrawn. The payments made are subject to income tax at that point.

An annuitant can choose to deposit a lump sum with the insurance company rather than making regular deposits over time to the plan. This is an option for someone who has received an inheritance or a cash settlement for a legal claim or a divorce judgment.

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Depositing Funds into an Annuity

There is a definite financial advantage for an annuitant to deposit funds into a plan early. The longer the investments have to grow, the greater the potential income for the annuitant when the time comes to withdraw money from the annuity.

There is no limit on the amount of money that can be deposited into an annuity. These financial products are not subject to the same restrictions on contributions that other investment options have, such as an IRA. They can form part of an overall retirement savings plan that also may include savings held outside of an annuity or other investment vehicle.

Starting an annuity early gives the investor the benefit of appreciation, where the value of the investment increases, and compounds, where the annuitant receives interest on top of the principal invested and interest accumulated. The annuitant will need to meet with a financial advisor to determine what combination of investments will help him or her to moderate potential risk and get the best possible returns on the investment.

When there will be a number of years between the deposits and the time the funds will be withdrawn, the annuitant can let the power of compound interest work to increase his or her holdings exponentially. A longer period of time also lets the annuitant ride out times when the rate of return is lower than anticipated.

Withdrawing Funds from an Annuity

No matter whether the deposit is made to the plan at once or over a number of years, the insurance company invests it on the annuitant’s behalf until he or she is ready to start receiving payments under the plan. The annuitant can withdraw funds during the accumulation phase if he or she wishes, but the money will be subject to a penalty as well as income tax. The insurance company may also impose surrender charges on the annuitant. Be sure you understand the specific annuity taxes and fees that are involved.

Once the annuitant starts withdrawing funds from the plan, most annuities do not provide for extra payments other than the scheduled ones. When considering an annuity as a way to save money for retirement, the investor should consider all of his or her options carefully, including the frequency of payments.

The accumulation phase is where the annuity is set up and the policy holder deposits funds to be invested on his or her behalf. This phase ends once the annuitant starts to withdraw money from the plan.

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