An annuity is often used as secure way to invest for your retirement. Both qualified and non-qualified annuities may be included in an individual plan or in one sponsored by your employer.
The terms qualified and non-qualified refer to the way you will pay taxes on the money placed into the account and withdrawn from the account, according to IRS regulations.
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A qualified annuity means your contributions are made with pre-tax dollars, money you contribute before paying taxes, and reduces your taxable income. Qualified annuities may be in 401(k) plans, IRAs or pension plans.
The term non-qualified means that the contributions you make in the account are with after-tax dollars. Both qualified and non-qualified plans may be set up for your individual retirement account or through an employer, who might also contribute depending of the rules of the plan. Non-qualified plans are often bought through an insurance company.
Discuss your options with a financial planner or annuity agent. There are general differences between qualified and non-qualified annuities for financial planning.
The contributions and the earnings of a qualified plan are tax-deferred until you start making withdrawals. At that time, money is taxed at your regular income tax rate. If you have a non-qualified plan, you have already paid taxes on the money you contribute, so you will only be taxed on the earnings, not your contributions, according to Woodmen of the World.
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You must have money from an earned income to invest in a qualified plan. The money is subject to tax normally but becomes tax-deferred when contributed to a qualified plan. When contributing to a non-qualified plan, you use money that has already been taxed.
The IRS limits the amount that can be contributed by an individual in a qualified plan. The maximum amount is $18,000 a year with a catch-up additional amount of $6,000 for employees aged 50 and over, according to 2015 IRS regulations
For an IRA, an individual retirement account, the contribution is limited to $5,500 with a catch-up of $1,000. There is no IRS limit on contributions into non-qualified plans.
Withdrawals from a qualified plan must begin required minimum distributions when you turn 70 and a half. Non-qualified plans do not require withdrawals at a particular age.
Fees on non-qualified plans are generally higher than on qualified plans. "Most variable annuities have such high costs built into them that they're generally bad investments,” says Larry Elkin of Palisades Hudson Management, as reported by Wealth Management.
"When all is said and done, you're generally paying 1.5 percent to 2.5 percent more in avoidable expenses," he adds.
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