Understanding Qualified vs Non-Qualified Annuity

Annuities come in many forms.  There are immediate and deferred annuities, both of which can have fixed or variable rates of return.  Furthermore, annuities also differentiate by tax advantages – qualified or non-qualified. 

Qualified vs Non-Qualified Annuity – What’s The Difference?

Did you know that the federal government wants t help you live a successful retirement?  It’s true. There are tax advantages to investing in financial products that provide future financial security.  

An annuity connected to a qualified retirement plan has tax advantages that help you grow your retirement income.  An annuity not connected to a formal retirement plan does not have tax advantages.

The difference between a qualified vs non-qualified annuity is how you pay taxes on your investment.

Qualified Annuities

Qualified annuities are part of a formal retirement plan. Typically through an employer.   The tax advantage granted allows you to load your annuity funds with pre-taxed dollars. As a result, your investment grows, and compounds at a faster rate.  In other words, more income for you throughout retirement.

With a qualified annuity, you defer your tax obligation until you begin taking income distributions.  Not only does your investment grow at a faster rate, but you also take control of your future tax rate.  Ultimately, you control the rate at which you pull income from your annuity.  Meaning you have control over your income tax bracket.   Informed investors can maximize their retirement savings by strategically designing the annuity to coincide with other income streams such as social security and, therefore, significantly minimize annuity taxation.

Non-Qualified Annuities

A non-qualified annuity is not part of a formal retirement plan.  Therefore, there are no additional tax advantages of loading the investment with pre-taxed dollars.   

With a non-qualified annuity, you invest funds post-tax.  While this does initially slow your investment growth,  you will only pay taxes on the capital gain (growth) made from the investment once you begin taking income distributions. 

Customizing Qualified & Non-Qualified Annuities

Unlike most retirement investment products, annuities have flexible design options to help people in a wide variety of life circumstances.

While many retirees are looking to protect their retirement nest egg, others are looking for growth.  Luckily an annuity can do both.

Do you need income now or in the future?

An immediate annuity forms through a single, one-time premium payment, making all the benefits of the annuity immediately available.  If you have a significant lump-sum to invest or looking to roll over another investment such as a 401k or IRA, an immediate annuity can provide an immediate source of income that can last as long as you live.

A deferred annuity forms through a series of scheduled premium payments allowing you to build your retirement income over time.  Deferred annuities are popular for individuals still working and don’t need to pull income until sometime down the road.  This option also allows you to load your annuity funds without breaking your budget.

Are You Looking For Protection Or Growth?

Both qualified and non-qualified annuities have the option of choosing the interest rate for their investment.

Individuals looking for protection but still grow to outpace inflation should elect for a Fixed Rate Annuity.  Fixed-rate annuities provide a guaranteed rate of growth and protection from market exposure.  Many financial experts consider fixed-rate annuities as the ideal low-risk investment product.

Individuals that need to grow their retirement income can elect for a variable rate annuity. Variable annuities provide a variable rate of return based on market fluctuations. This option has the potential for higher yields and carries the risk of no growth and even possible capital loss.

Finding Your Best Investment 

As mentioned above, if you’re considering an annuity purchase, understanding the difference between a qualified vs non-qualified annuity can have a significant impact on your retirement income.  

It’s critically important that you understand your investment options before making any decisions. Our independent agency is here to help answer any question and help you shop and compare the best annuity products on the market.   Our agents are independent, meaning they work for YOU, not the insurance companies. 

See why thousands of individuals have trusted us to help them maximize their retirement income.  Explore your options today. Fill out the form on your screen to get started.