Know The Difference Between Qualified and Nonqualified Annuities
For many investors looking to secure their cash flow in retirement, annuities are a common way to receive the guaranteed income they need in the future.1 Different annuities exist, so knowing which option fits your financial life and goals is important. Here are some points on the key differences between qualified and nonqualified annuities.
What is a qualified annuity?
A qualified annuity is one that you fund using pre-tax money. You invest in these funds to grow your assets in exchange for distributions once you retire. The term “qualified” comes from the IRS and references the annuity’s eligibility for tax deductions.2
What is a nonqualified annuity?
A nonqualified annuity allows you to grow your assets similarly to the qualified annuity. One main difference lies in how you fund the investment. Nonqualified annuities use post-tax dollars, meaning you fund the investment using money you’ve already paid taxes on — such as income from wages and tips.34
Is each annuity taxed differently?
Yes. Due in part to how you fund each annuity (using pre- or post-tax dollars), you have different tax liabilities when you take distributions.5
Since you pay into the annuity with pre-tax dollars, the IRS will want to capture taxes eventually. Instead of paying taxes on the money you bought the annuities with, you receive tax-deferred interest credit until you withdraw funds — meaning you pay no taxes while saving.67 As a result, you’ll pay ordinary income tax on the distributions you take.8
Further, if you withdraw funds before you turn 59 1/2, you will have to pay an additional 10% federal tax.9
Qualified annuities have maximum contribution limits and limited flexibility.10 Be sure to consult your financial professional for deeper insights into their abilities and limitations.
With post-tax dollars, you have different tax obligations. When you fund nonqualified annuities with earned income that’s already taxed, you can receive a tax refund in the years you take annuities income.11 The applicable tax rate when you made contributions will determine the refund you’ll receive.12
Nonqualified annuities have no IRS-set contribution limits, earned income requirements, or rules on minimum withdrawal.13 Be sure to consult your financial professional for deeper insights into their abilities and limitations.
Your financial needs and goals will drive which annuity strategies and structures you choose to create the cash-flow you desire. To explore your retirement income goals, please contact us. We’re happy to help you make the most of your financial opportunities.
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