Qualified or Non-qualified Annuities

You must have carefully studied the market and calculated your returns before you invested your dollars in your annuity. However, if you think now that your annuity is not getting you enough or a change in your investment strategies could bring you more then this is the time to consider your investment options before you decide whether you want to invest in qualified or non qualified annuities.

Few Important Facts about Different Annuities

There are immediate, fixed and variable annuity plans. You need to get proper information about the various functionalities of qualified and non qualified annuities.

Qualified annuity is applicable to employees who have got retirement from offices or those whose service will be soon completed. Under section 403(b) retirement/pension plans TSAs or IRAs, a retiree will get financial benefits and other privileges from the underwriters if he opts for qualified annuity and which is also tax deductible to some extent. In that case, an annuitant will have to provide legal papers and documents to the concerned authority of the insurance company. As per the rules of qualified annuity, people enjoy tax deferral schemes which are effective during the growth of earnings till the maturity of the plan. However, in that case it depends on the type and features and nature of the annuity plans.

On the other hand, the application of non-qualified annuity plans is fully different comparing to the qualified annuity.

  • Non-qualified annuities are not tax deferred.
  • Non-qualified annuity is not entitled to 403(b) pension/retirement plans.
  • This annuity also ensures excellent guaranteed returns after specific time range.

What are qualified annuities?

Qualified annuities are those that are offered by your employer as part of a pension or salary reduction plan. You may find a qualified annuity listed on your menu of options with a 401(k) plan.

The contributions you make to qualified annuities must come out of your earned income. This comes with tax benefits since investing in qualified annuities reduces the amount of your taxable salary.

Non Qualified Annuities

What are non-qualified annuities?

Non qualified annuities are not categorized under government‘s pension plan and it is not tax free. Annuity is the written mutual contract or insurance which provides financial support to annuity holders who will get scope to earn money even after the retirement from service. Annuity requires investment. That means a person is liable to pay premiums in series for the certain period of time to get financial returns after the maturity of the annuity. There are different types of annuities and you need to be acquainted with the basics of various types of annuity plans.

Non-Qualified Annuities- Are They Tax Deferral?

Non-qualified annuities are not tax deductible or reducible as this annuity plans are not fallen under IRA pension (for employees) act. Anyone can invest money to expect fixed returns on the non-qualified annuity. However, if the financial returns are higher than original premiums which were deposited in past, annuitants will have to pay back taxes under the ordinary income tax law. However, this type of tax imposition on the withdrawn money depends on the different states where law is varied. In addition, non-qualified annuities tax violation act is applicable to the accused/defaulters, who are not eager to pay the taxes on the returns after the maturity of the non-qualified annuity. In that case he or she will have to pay penalty charges for the inability to clear the taxes.

On the other hand, in the case of variable annuity, there certain risks of lopsided improvement in the stock market which can affect the variable annuity. Variable annuities are basically long term insurance plans which are sensitive to fluctuation and anomalies in the stock market. There are certain risks of investing money. Maybe, in the event of the severe breakdown in the financial market or stock exchange, earnings can go down and the annuitant can face severe financial loss. Besides, there are administrative charges/fees and other incidental expenses.

Indexed annuity is another type of insurance which ensures good financial returns on equity based insurance or annuity plans. The advantage of opting for indexed annuity lies in the flexibility of investment process, easy terms and conditions along with fixed return guaranteed schemes in spite of poor result in the stock market. If the stock exchange doesn’t perform well, the annuitant will not suffer in the long run.

Annuities Need to Be Selected Properly

Again, there are also deferred annuities which are also capable of offering good returns to annuitants. In the case of deferred annuity, there is higher possibility of slow payment process. Financial returns will be backfired to annuity holders via installment schemes. In that case after getting the consent from the annuitants, underwriters will start paying at short or long intervals relying on the preset terms and conditions with the clients. There are two major phases of deferred annuity like savings and income schemes. Under the savings category, a person is required to update your account by depositing money. At the second phase, the earnings (income) will be transferred into an annuity and this financial insurance will spoon feed the investor through installments. In that case, you will have to do good research by studying in different online sites and blogs. The insurance company provides death benefits and other financial mileages to annuity holders to get good profits and income.

Before getting locked into the contract with your underwriter to earn on non-qualified annuity, you need to be familiar with annuities pros and cons. Annuity insurance kit should be selected after thorough investigation. You need to collect information about the authenticity of the annuity planners who should provide the reliable service to their clients. At the same time, you need to do special comparison study and research to choose your non-qualified annuity for getting better earnings on the total invested fund. On the amount of premiums, the earnings will be higher and lower. However, in that case, you should check the insurance papers, different plans and what sorts of premium rates are available for applicants who are going to have their non-qualified annuities.

Immediate annuities are also advantageous and annuitants can start immediately paying premiums after signing up the legal contract and documents for getting financial benefits. According to the researchers and market analyzers, a person should decide first what type of annuity will be fitted to him. Similarly, he will have to read reviews, analytical notes and feedbacks of clients, researchers and annuity planning experts to feed himself well while short listing the popular and sought after annuities.

Whether it is qualified or nonqualified; fixed and variable annuities; immediate or deferred annuity plans, it has opened new source of income to the retired community. After getting retirement from the service, an aged person wants money for bearing expenses. This type of annuity plan will certainly help you to have good returns every month. Even you are getting death benefits, tax deductibility option along with fixed returns after the specific time limit. Good and workable non-qualified annuities can ensure stable retirement income. You will have to make proper investment to steer clear of cancellation of the annuity due to the non payment of premiums. If you choose annuity properly, you will get good scope to hand over the annuity to the next beneficiary in your family in your absence and sudden expiry. This type of flexibility in annuity plan seems to attract the retired persons to choose different types of annuities for reinforcing the retirement income.

Qualified versus non-qualified annuities

Qualified Annuities Non-qualified Annuities
Tax deferred earnings Tax deferred earnings
Early withdrawal penalty Early withdrawal penalty
Invest pre-tax dollars Invest post-tax dollars
Contribution limits No contribution limits
Withdrawals must begin by age 70.5 in most of the cases No federal withdrawal rules, but, there may be state laws


Benefits of Qualified and Non Qualified Annuities

It is possible that you are thinking of complementing your social security earnings with investments in qualified or non-qualified annuities. It is equally possible that you are not sure where to invest, not knowing enough about the benefits that each of the annuities offer. However, it is of paramount importance that you choose you investment option correctly before investing. The benefits of Qualified and Non-Qualified annuities are discussed below.

Benefits of a qualified annuity
You can use a qualified annuity to invest and pay out money in a tax-favored retirement plan, like an IRA or Keogh plan or plans under the Internal Revenue Code sections, 401(k), 403(b), or 457.

These follow the IRS rules for taxes and contributions as you purchase them with your pre-tax dollars. The conditions are such that the premiums or contributions (money paid into the annuity) are not included in your taxable income for the year in which you pay it.

Benefits of a non-qualified annuity

There is no limit on the annual amount you can put into a non-qualified annuity. This means you can add as much to your account as you wish to in any year, either in incremental payments or a lump sum. But, some contracts might have a total limit, usually in the $1 million range. Not just your earned income, you can use money from any source using after-tax dollars for a non-qualified annuity. This means you can use gifts or an inheritance too. There is no federal law dictating when you begin drawing income from the annuity.

In addition, there are no required withdrawals. You are not required to begin receiving your income by age 70.5. So, you have more control over your financial planning. Some states and some annuities providers might need you to begin receiving your income, usually by the time you reach 85 or 90.

Earnings from your annuities, qualified and non-qualified, are tax-deferred until you withdraw them. After withdrawal, they are treated as taxable income, be it from selling capital at a gain or from dividends.

How to get the best gains from a non-qualified annuity

You can buy a non-qualified annuity to add to the amount you are putting into an employer-sponsored plan. Or, if you are self-employed, you can use a non-qualified annuity as an alternative source of retirement income.

If you are part of an ESOP which puts your pension money into company stock, you can use a non-qualified annuity to put money into other types of equity portfolios. You may think that your investments in employer plans also offer variety and flexibility. But with annuities, it only gets bigger and better. This offers you a unique opportunity to diversify your portfolio. If your defined benefit plan pays you a fixed amount after you retire, you can put money into a variable non-qualified annuity. This way, your annuity income will survive any rough phase of inflation. For more information visit the annuities section in the RetireOnYourTerms website.

There is no clear verdict as to whether a qualified annuity offers more benefits than a non-qualified one. Money market is a complex area and you need to tread with caution. Identify your investment goals and let your needs decide the right annuity plan for you.