What are Periodic Payments?
Periodic payments are a structured series of payments that are disbursed from some type of qualified financial plan. Payments of this type may be generated from an annuity program, any account that carries a fixed term of payments over the course of several years, or a qualified retirement plan. There are some exceptions, in which certain retirement plans are not considered to issue periodic payments, even if the disbursements are set to occur on a specific schedule over a number of years.
The idea behind periodic payments, as they relate to retirement plans, is to provide the owner of the account with a consistent stream of income. The series of payments may be structured to occur on a monthly, quarterly, semi-annual or annual basis, depending on the type of retirement program involved, and the terms that govern disbursements from the plan. While some plans are structured to issue payments based on the return generated by the principle amount contained within the plan, others are set up to incrementally disburse both any interest and a portion of the principle over a pre-determined number of years.
Many of these retirement plans allow the owners to defer the payment of taxes until funds are disbursed, a strategy that makes it possible to pay only on the amount that is actually received as periodic payments throughout the course of the tax year. Other plans require the payment of taxes at the time the funds are placed into the account, allowing the later disbursements to be tax-free. There are advantages to both approaches, and the investor seeking to establish a comprehensive retirement program would do well to consider each approach before making a final decision.
It is important to note that not all retirement plans are considered to include what is legally defined as periodic payments. Often, the distinction has to do with how the payments are treated for tax purposes, rather than the schedule used to make the disbursements. In the United States, most individual retirement plans or IRAs, are not considered to disburse periodic payments. The same is true of the individual savings account or ISA that is offered in the United Kingdom.
In order to determine if the periodic payments issued from any type of financial plan are subject to taxes, it is necessary to look closely at current tax law in the country of jurisdiction. Depending on the location, various annuity plans, mutual fund offerings, and other investment strategies that generate revenue from time to time may or may not be subject to withholding at the time the return is generated. Knowing exactly what is expected in terms of tax liability will help the investor to avoid incurring penalties when the payments actually occur, while also enjoying greater benefit from the funds issued from the plan.
Contractors or those who are self-employed usually receive periodic payments as well. Often times, the contractor will get to decide how often he or she wants the payments.
Contractors and self-employed also have to file quarterly taxes, unless they make less than a certain amount per year. In that case, they can file once a year like others. That's what I do because my annual income is below the threshold.
@ddljohn-- I don't think that there is an advantage with one type of periodic disbursement. But it depends on your needs and other sources of income.
If this is your only source of income, you might want to have it disbursed once a month so that you have enough for your monthly expenses. Some people also prefer to have theirs paid every three months or quarterly. The advantage with this is that you will receive a greater sum of money at once. So if you had delayed purchasing something more costly, then it might be beneficial to have the money paid quarterly.
If you're asking about advantages in regards to taxes, I don't think that there is an advantage. You might have to pay taxes for each quarter regardless of how frequently you receive the money.
Which type of retired periodic payments are best? Should I have mine disbursed monthly or quarterly? Is there an advantage with one type?
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