What are periodic payments? (with photos)

Periodic payments can be generated from a qualifying retirement plan.

Periodic payments are a structured series of payments that are disbursed from some sort of qualifying financial plan. Payments of this type can be generated from an annuity program, any account that has a fixed payment term over several years, or a qualifying retirement plan. There are some exceptions where certain retirement plans are not considered to issue periodic payments, even if disbursements are set to occur on a specific schedule over several years.

The idea behind periodic payments is to provide a retirement account owner with a consistent stream of income.

The idea behind periodic payments, as it pertains to retirement plans, is to provide the account owner with a consistent stream of income. The series of payments can be structured to occur on a monthly, quarterly, semi-annual or annual basis, depending on the type of retirement program involved and the terms governing plan disbursements. While some plans are structured to issue payments based on the return generated by the principal amount contained in the plan, others are configured to incrementally disburse any interest and a principal over a predetermined number of years.

Many of these retirement plans allow owners to defer payment of taxes until the funds are disbursed, a strategy that makes it possible to pay only the amount actually received in periodic installments throughout the fiscal year. Other plans require payment of taxes at the time funds are deposited into the account, allowing later disbursements to be tax-free. There are advantages to both approaches, and an investor looking to establish a comprehensive retirement program would do well to consider each approach before making a final decision.

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It is important to note that not all retirement plans include what are legally defined as periodic payments. Often the distinction has to do with how payments are handled for tax purposes rather than the timing used to make disbursements. In the United States, most individual retirement plans or IRAs are not considered to pay out periodic payments. The same applies to the individual savings account or ISA offered in the UK.

To determine whether periodic payments issued under any type of financial plan are subject to tax, it is necessary to carefully review the tax legislation in force in the country of jurisdiction. Depending on the location, various annuity plans, mutual fund offerings and other investment strategies that generate income 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 not to incur penalties at the time of making payments, in addition to enjoying a greater benefit with the resources coming from the plan.

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