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.