Types of Annuities
Call us at
(800) 318-7848
Qualified and nonqualified annuities
An annuity is qualified when it is associated with an employee benefit plan that meets certain tax requirements in the U.S. Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). The earnings growth of a qualified annuity is exempt from current income taxation, and in many cases the contributions to a qualified annuity are on a pretax basis, reducing your annual taxable income. But, there are limits on how much you can invest.
A nonqualified annuity has few investment limits and retains tax advantages during accumulation, but cannot be funded with pretax dollars. Generally speaking, many investors purchase nonqualified annuities after they have maximized their participation in an employer-sponsored plan.
An annuity is qualified when it is associated with an employee benefit plan that meets certain tax requirements in the U.S. Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). The earnings growth of a qualified annuity is exempt from current income taxation, and in many cases the contributions to a qualified annuity are on a pretax basis, reducing your annual taxable income. But, there are limits on how much you can invest.
A nonqualified annuity has few investment limits and retains tax advantages during accumulation, but cannot be funded with pretax dollars. Generally speaking, many investors purchase nonqualified annuities after they have maximized their participation in an employer-sponsored plan.
Fixed and variable annuities
Annuities also can be categorized as fixed or variable depending on how contributions are invested and what guarantees are offered. With a fixed annuity, an insurer guarantees to pay a specified rate of interest on the accumulated value of the annuity for a specified period of time. If converted to an income stream for life, the payments will be fixed. With a variable annuity, both the accumulated value and the periodic payments vary with the performance of a specific portfolio of investments chosen by the contract owner.
Annuities also can be categorized as fixed or variable depending on how contributions are invested and what guarantees are offered. With a fixed annuity, an insurer guarantees to pay a specified rate of interest on the accumulated value of the annuity for a specified period of time. If converted to an income stream for life, the payments will be fixed. With a variable annuity, both the accumulated value and the periodic payments vary with the performance of a specific portfolio of investments chosen by the contract owner.
Generally speaking, a fixed annuity is a more conservative investment. With a variable annuity, the contract owner can have a hedge against inflation but assumes the investment risk. However, a variable annuity also can offer fixed investment options.
Nonqualified annuities
Individual Retirement Annuity (IRA)
Tax-deferred growth of retirement income and tax-deductible contributions - those are the most attractive features of an IRA. Depending on your income and participation in an employer-sponsored retirement plan, up to $4,000 a year may be contributed to an IRA, and the investment is fully deductible. The IRA's earnings are taxed only at withdrawal. Any wage earner under age 70½ is eligible. Some working spouses also may have IRAs. If you are age 50 or older, you may contribute an additional $1000 per year.
Tax-deferred growth of retirement income and tax-deductible contributions - those are the most attractive features of an IRA. Depending on your income and participation in an employer-sponsored retirement plan, up to $4,000 a year may be contributed to an IRA, and the investment is fully deductible. The IRA's earnings are taxed only at withdrawal. Any wage earner under age 70½ is eligible. Some working spouses also may have IRAs. If you are age 50 or older, you may contribute an additional $1000 per year.
IRAs can be fixed or variable.
Roth IRA
Tax-free retirement income - that's the main appeal of a Roth IRA. With a Roth IRA, you receive no up-front deduction for annual contributions. But, if you meet the tax law's rules, you may withdraw money from a Roth IRA tax-free. In other words, there is no tax on a Roth IRA's investment earnings. Eligible individuals of any age may contribute up to $4,000 a year, whether or not they participate in employer-sponsored retirement plans. Married couples may contribute up to $4,000 annually to each of their Roth IRAs. If you are age 50 or older, you may contribute an additional $1000 per year.
Tax-free retirement income - that's the main appeal of a Roth IRA. With a Roth IRA, you receive no up-front deduction for annual contributions. But, if you meet the tax law's rules, you may withdraw money from a Roth IRA tax-free. In other words, there is no tax on a Roth IRA's investment earnings. Eligible individuals of any age may contribute up to $4,000 a year, whether or not they participate in employer-sponsored retirement plans. Married couples may contribute up to $4,000 annually to each of their Roth IRAs. If you are age 50 or older, you may contribute an additional $1000 per year.
Qualified annuities
403(b) Tax-Deferred Annuity
Tax-deferred growth of retirement income and pretax contributions - those are two big reasons why employees of public schools, hospitals, colleges and universities, and certain nonprofit organizations participate in 403(b) annuities. Many employers match a specific percentage of employee contributions. With a 403(b), your annual taxable income is less and your annuity's earnings are taxed only at withdrawal. And, payroll deduction makes it easy to contribute on a regular basis. Most employer-sponsored plans offer fixed and variable investment options.
Tax-deferred growth of retirement income and pretax contributions - those are two big reasons why employees of public schools, hospitals, colleges and universities, and certain nonprofit organizations participate in 403(b) annuities. Many employers match a specific percentage of employee contributions. With a 403(b), your annual taxable income is less and your annuity's earnings are taxed only at withdrawal. And, payroll deduction makes it easy to contribute on a regular basis. Most employer-sponsored plans offer fixed and variable investment options.
401(a) Defined Contribution
Tax-deferred growth of retirement assets and tax-advantaged contributions - those are two main reasons why employees at private and publicly held companies participate via payroll deduction in 401(a) Defined Contribution annuities. Many employers match a specific percentage of employee contributions. With a 401(a) annuity, by setting aside a specified amount of your pay on a pre-tax basis, you receive tax benefits on your contributions and your annuity's earnings are taxed only at withdrawal.
Tax-deferred growth of retirement assets and tax-advantaged contributions - those are two main reasons why employees at private and publicly held companies participate via payroll deduction in 401(a) Defined Contribution annuities. Many employers match a specific percentage of employee contributions. With a 401(a) annuity, by setting aside a specified amount of your pay on a pre-tax basis, you receive tax benefits on your contributions and your annuity's earnings are taxed only at withdrawal.
457 Deferred Compensation
Tax-deferred growth of retirement income and pretax contributions - those are two of the features that matter most to employees of governmental agencies and state political subdivisions who participate via payroll deduction in 457 Deferred Compensation annuities. With a 457 Deferred Compensation annuity, you may set aside up to 100% of your annual salary, or a maximum of $15,500, and reduce your annual taxable income. Your annuity's earnings are taxed only at withdrawal.
Tax-deferred growth of retirement income and pretax contributions - those are two of the features that matter most to employees of governmental agencies and state political subdivisions who participate via payroll deduction in 457 Deferred Compensation annuities. With a 457 Deferred Compensation annuity, you may set aside up to 100% of your annual salary, or a maximum of $15,500, and reduce your annual taxable income. Your annuity's earnings are taxed only at withdrawal.
Simplified Employee Pension (SEP)
Tax-deferred growth of retirement income and tax-deductible contributions to a plan that's inexpensive and easy to administer - those are the reasons why self-employed individuals and small business owners invest in SEP annuities. A SEP plan is essentially a group of IRAs, one for each employee, although different contribution rules can apply. Each year, an employer can contribute up to $45,000, or 25%, of an eligible employee's reduced salary, (the salary reduced by the employee contribution to the SEP) whichever is less. The employer may change the percentage annually.
Tax-deferred growth of retirement income and tax-deductible contributions to a plan that's inexpensive and easy to administer - those are the reasons why self-employed individuals and small business owners invest in SEP annuities. A SEP plan is essentially a group of IRAs, one for each employee, although different contribution rules can apply. Each year, an employer can contribute up to $45,000, or 25%, of an eligible employee's reduced salary, (the salary reduced by the employee contribution to the SEP) whichever is less. The employer may change the percentage annually.
What's involved in purchasing an annuityAn investment in the securities underlying a variable annuity involves investment risk, including possible loss of principal. Investment return and principal will fluctuate. Variable account investments in an annuity are not FDIC-insured, nor are they deposits guaranteed by a bank or any other entity, not insured by any federal government entity, so you may lose money.
Any fixed-income and lifetime income options offered by a variable annuity are guaranteed by the claims-paying ability of the insurer. Fees and expenses are described in the prospectus.
Any earnings in a variable annuity are “tax-deferred,” that is, not taxed until withdrawn. When withdrawn, earnings are taxed as ordinary income. There is typically a 10% federal tax penalty on earnings withdrawn before age 59½. When used to fund an IRA or other tax-deferred retirement plan, a variable annuity does not provide additional tax deferral for that plan, since these plans are already afforded tax deferred status.
Any fixed-income and lifetime income options offered by a variable annuity are guaranteed by the claims-paying ability of the insurer. Fees and expenses are described in the prospectus.
Any earnings in a variable annuity are “tax-deferred,” that is, not taxed until withdrawn. When withdrawn, earnings are taxed as ordinary income. There is typically a 10% federal tax penalty on earnings withdrawn before age 59½. When used to fund an IRA or other tax-deferred retirement plan, a variable annuity does not provide additional tax deferral for that plan, since these plans are already afforded tax deferred status.
This is a FREE service to you.
