“For most annuities, if you just take a withdrawal, it will be deemed to have come first from earnings, meaning that the entire amount is taxable until the value of the annuity contract falls below the total of the premium payments you initially invested.”Īnother drawback is that non-qualified annuity premiums are not deductible from gross income. “Exactly how much of your withdrawal is subject to tax can get tricky,” they add. “Just like a retirement account, withdrawals from a non-qualified annuity result in taxable income in the year in which you take money out of the contract.” “Investors face a trade-off with non-qualified annuities,” adds the Fool Staff. No Required Minimum Distributions at age 70½.Other advantages with non-qualified annuities include So-called Section 1035 exchanges cover the trading of life insurance policies and annuity contracts, and the tax-law provision allows such exchanges without having to recognize capital gain.” “As long as your money remains invested in the annuity contract, you don’t have to pay any taxes on any income or gains that the annuity produces.” Moreover, since “annuity contributions aren’t eligible for any sort of tax deduction, the tax treatment of an annuity most closely resembles a nondeductible traditional IRA.”Īdditionally, “the tax laws allow you to make transfers from one annuity to another without recognizing any tax. “The biggest benefit of an annuity is that your investment can grow on a tax-deferred basis,” notes the Motley Fool Staff. Advantages and Disadvantages of a Non-Qualified Annuity So, if you die before disbursements are issued, the remaining annuity funds can go to a beneficiary or heir. And, through a 1035 exchange, you can transfer funds from one policy to another without any consequences.įurthermore, like most other types of annuities, you can include a death benefit. There also isn’t a mandatory distribution age. As such, this allows for tax-deferred growth.Ĭommon examples of non-qualified sourcing funds include Īgain, there are no contribution limits. Because you’re rolling over funds that have already been taxed, aka after-tax dollars, your initial investment is not subject to taxes once it’s disbursed. If you’re still lost on what exactly a non-qualified annuity is, hopefully, this next section will clear the air.Ī non-qualified annuity is a product that you purchase outside of an employee benefit, such as a 401(k). Just be aware that the insurance company that sold you the annuity may set an annual cap on contributions. Unlike a Roth IRA, however, earnings that are withdrawn from non-qualified annuities are taxable at your regular tax rate.Īnd, the IRS doesn’t impose limitations on how much you can contribute to a non-qualified annuity annually. So, in a way, this is similar to how a Roth individual retirement account works. Additionally, there are no required minimum distributions. That means you’ve already paid taxes on the money that you used to purchase it with. With non-qualified annuities, you’re using after-tax dollars to fund the annuity. And, annuities can be partially or fully sold for cash or passed on to a beneficiary. They can also accumulate at a fixed or variable rate. What’s more, annuity payments can either last for a fixed period of time or be guaranteed for life. With an immediate annuity, payments begin, well, immediately. With the former, you’ll receive payments maybe five or twenty years from now. You can decide if you want the annuity payments to be deferred or immediate. But, with annuities, it can get become much more complex. In that way, an annuity is like grabbing a tasty sandwich from a deli. In return, the insurance company will make payments to you at a later date. You pay the annuity company a specific amount of money for the annuity contract. Is a non-qualified annuity right for you?Īs a refresher, when you buy an annuity you’re pretty much purchasing an insurance contract.How do distribution and transfers work with a non-qualified annuity?.How are distributions from accumulation annuities taxed?.What do you purchase non-qualify funds with?.Non-Qualified Annuity Withdrawl and Taxes.Advantages and Disadvantages of a Non-Qualified Annuity.
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