Annuities Explained - Qualified vs. Nonqualified

With annuities explained, you will learn that qualified annuities carry substantially different contribution, withdrawal, and tax rules as compared to non-qualified annuities. The differences involving both types of annuities are explained below. Read on, so you have a better understanding.

Non-qualified annuities explained

Just like earnings on the life insurance contract are not taxed, so are earnings within an insurance annuity. But this is true, just as long as the money remains inside annuity, which is known as the accumulation stage. When the earnings are withdrawn, they're taxed. Furthermore, it is important to remember, that the government levies a 10% penalty charge should you withdraw any earnings prior to the age of 59½; the regular income tax and contract service fees could also be charged. These are the basic aspects of non-qualified annuities explained.

With non-qualified annuities, which means your investment contribution has already been taxed, there are simply no limits on the contributions you could make. In addition to choosing whether or not you'd like to get variable or fixed annuities (explained in other posts), it's also possible to choose how you wish to contribute during the accumulation phase. You might make a one-time, immediate payment, or you can choose to make equal payments over time. The idea is to accumulate a nest egg that grows tax deferred for your retirement years.

Importantly, there's not too many age restrictions upon when you can your annuitization payments--i.e. you can start anytime. Even so, many insurance companies may force you to start payments at age 85 or close out your contract, although, this too could change from one insurance annuity contract to another. In terms of taxation of annuities explained, a portion of each payment is subject to tax and a portion is tax free.

Qualified annuities explained

Qualified annuities are basically an annuity "inside" a tax sheltered plan such as an IRA or 401k. The account is therefore subject to the rules of the IRA or 401k. The table which follows at the end offers the variations of annuities explained and summarized, but before that let's help you understand the core advantage that qualified insurance annuities offers you.

Qualified annuities allow you to employ pre-tax contributions, although, there are limitations on yearly contributions. For 2011, the amount was limited to $5,000 for those under age fifty, and $6,000 for those older. This is the same as any type of traditional IRA. IRS regulations additionally require that variable or fixed annuity owners start distributions when you become age 70½.

The distributions must fulfill the minimum required distribution (MRD) associated with qualified plans and IRAs. Any distribution from a qualified annuity is taxed as ordinary income, just like any tax sheltered retirement account.

Rollover Annuities Explained

Transfers, roll outs or rollovers directly into qualified annuities explained here (one may not combine a non-qualified annuity with any type of retirement finds such as IRA / 401k).

You could use your own qualified annuity to roll out other pre-tax qualified plans, like an IRA or perhaps 401(k). Often, insurance agents will solicit your business to roll over your 401k into their qualified annuity when you retire.