Growth period before taking income
Quick Definition: The accumulation phase is the period when your money grows in an annuity before you start taking income payments. During this time, earnings are tax-deferred, surrender charges typically apply, and you're building the value that will eventually fund your income stream.
Most annuities have two distinct phases:
1. Accumulation Phase (Growth):
Your money grows tax-deferred. You're not taking regular income yet. This can last 5-30+ years depending on your goals.
2. Distribution/Income Phase (Payout):
You convert to income payments or start systematic withdrawals. This typically lasts for life or a set period.
Not all annuities have both phases. SPIAs (immediate annuities) skip accumulation entirely—you start income immediately.
Purchase: $250,000 FIA at age 55
Accumulation phase: Ages 55-70 (15 years)
Goal: Let it grow until retirement
During accumulation:
→ Earnings credited based on index performance (subject to caps)
→ 0% floor protects principal from losses
→ No income taxes on growth (tax-deferred)
→ Surrender charges if withdrawal exceeds 10% annually
→ Account value grows to $420,000 by age 70
Transition to income phase at age 70:
→ Activate income rider for $28,000/year for life
→ Or annuitize for structured payments
→ Or take systematic withdrawals
You don't pay income tax on gains while in accumulation phase. This is one of annuities' key benefits—compound growth without annual tax drag.
Comparison:
| Feature | Annuity (Accumulation) | Taxable Account |
|---|---|---|
| Annual gains | $20,000 | $20,000 |
| Taxes owed | $0 (deferred) | ~$5,000 (25% bracket) |
| Net growth | $20,000 compounds | $15,000 compounds |
| Over 20 years | Significantly higher | Tax drag reduces returns |
During accumulation, surrender charges typically restrict access beyond free withdrawal amounts. This is to protect the insurance company's commission costs and long-term investment strategies.
For FIAs and RILAs, accumulation phase earnings are tied to market index performance with caps and floors. Each year, gains are locked in and can't be lost in future down years.
For MYGAs, you earn a fixed rate during the accumulation period. Simple and predictable—like a CD but with tax deferral.
5-10 years: Short accumulation for near-retirees who want modest growth before income
10-20 years: Standard accumulation for mid-50s buyers building retirement income
20+ years: Long accumulation for younger buyers (though annuities may not be ideal for very long timeframes)
The longer you stay in accumulation without taking income, the more growth compounds tax-deferred—but surrender charges and product restrictions remain during this time.
Yes! Immediate annuities (SPIAs) skip accumulation entirely:
This makes sense if you don't need growth—you just want immediate, guaranteed income.
When ready to end accumulation phase, you have several options:
1. Annuitize
Convert account value to guaranteed lifetime income. Gives up access to lump sum.
2. Activate income rider
Start guaranteed income withdrawals while maintaining death benefit and potential growth.
3. Systematic withdrawals
Take regular withdrawals (within free withdrawal limits) without formal annuitization.
4. 1035 exchange
Move money to a different annuity or convert to immediate annuity for higher payout.
5. Cash out
Surrender the annuity (pay taxes on gains, possible surrender charges if still in surrender period).
The accumulation phase is your growth period—tax-deferred compounding before income starts. It's where annuities build value that will fund your future income. The phase can last anywhere from zero years (immediate annuities) to 20+ years depending on your timeline.
Key consideration: Don't stay in accumulation longer than necessary "just because." If you need income, transition to distribution phase. Tax deferral is valuable, but not at the expense of your actual income needs.