Qualified vs. Nonqualified Fixed Annuities

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Did you know that qualified fixed annuities carry significantly different contribution, withdrawal, and tax laws as compared to non-qualified fixed annuities? The differences in between both types of fixed annuities are explained the following. Read on.

Generally, non-qualified fixed annuities are those funded with after-tax dollars.  On the other hand, qualified annuities are those annuities included in a tax-sheltered plans or funded with money that comes from a tax-sheltered plans such as an IRA or 401(k).  Such qualified annuities are subject to the same rules of these retirement plans.

Non-qualified fixed annuities

Just like earnings in a life insurance contract are not taxed, so is income within an insurance fixed annuity. But this is true, simply as long as the money remains inside annuity, which is known as the accumulation period. When the earnings are withdrawn, they're taxed. In addition, it is important to remember, that the interest withdrawn from an annuity is taxed as ordinary income.  Additionally, there is an additional 10% tax if withdrawals are made prior to age 59 1/2.

There are also absolutely no limits on the contributions that one could make. You may also choose how you wish to invest during the accumulation phase. You may make a one-time, immediate payment, or you can choose to make equal payments over time.

Importantly, there are no age restrictions dictated by the IRS or the government regarding non-qualified fixed annuities. Even so, many insurance companies may require you to start making withdrawals by age 85.


Qualified fixed annuities

If you choose to put money into qualified fixed annuities, do remember that these tend to be regulated by tax rules and constraints like the IRAs and other similar qualified plans. The table in which follows at the end illustrates the differences between qualified and non-qualified annuities.

Qualified fixed annuities allow you to employ pre-tax contributions With the same funding restrictions that would apply to IRAs. For 2011, the amount is limited to $5,000 for those under 50 years of age, and $6,000 for those 50 and older. Like IRAs or 401(k)s, you must start taking mandatory distributions at age 70 1/2.  note also that 100% of all income and principal received is taxable since the funds contributed were after-tax funds which have never been taxed.

Transfers or Rollovers in to qualified or non-qualified fixed annuities explained

You could use your current qualified annuity to roll out other pre-tax dependent qualified plans, like an IRA as well as 401(k). in fact, many insurance agents without a securities license will recommend you do so.  Since they do not have securities available to sell, in order to make a sale, they will suggest that you roll your 401(k) or IRA balance into a qualified annuity.  these agents will also recommend buying an annuity in your IRA.  This must be done carefully as an annuity has far fewer advantages when owned in an IRA.


One thought on “Qualified vs. Nonqualified Fixed Annuities

  1. annuities geek says:

    Regrettably, most people who sell annuities are not competent advisors. Even if appropriate products are selected, many planning opportunities go unnoticed. For this reason, fixed annuities are often undersold and underutilized.

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