Non-Qualified Annuities: Saving Without Limits

Tax-Deferred Retirement Saving1

When saving for your later years, non-qualified annuities offer you the potential for tax-deferred earnings and a steady flow of income after you retire.

Pre-tax or After-tax?

The term “non-qualified” hints that there is another type of annuity, called “qualified.” So what are the differences? There are a few, as well as some similarities.

Qualified is just IRS language for funding with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. When you take a distribution from a qualified annuity, the entire distribution amount (contributions and earnings) is subject to ordinary income taxes.

A non-qualified annuity is funded with after-tax dollars, meaning you have already paid taxes on the money before it goes into the annuity. When you take money out, only the earnings are taxable as ordinary income.

Plus, you can purchase a non-qualified annuity regardless of whether or not you are covered under a retirement plan at work or if you have a Traditional IRA or Roth IRA.

Comparing Qualified and Non-qualified annuities

Here is a more complete list of the similarities and differences between qualified and non-qualified annuities:

Qualified Annuities Non-qualified Annuities
Tax-deferred contributions and earnings Tax-deferred earnings
Penalty for early withdrawal Penalty for early withdrawal
Invest pre-tax dollars Invest after-tax dollars
Individual must have earned income No earned income requirement
IRS Contribution limits No IRS contribution limits; Woodmen of the World limits contributions to $25,000 per year.
In most cases, withdrawals must begin by age 70-1/2 No federal withdrawal rules, but there could be state laws

Non-qualified tax advantages

  • An additional income stream when you retire
  • Earnings grow tax deferred until withdrawn.*
  • Longer age limits on contributions
  • No Required Minimum Distributions at age 70-1/2

Retirement Considerations

You also need to consider how you will receive your non-qualified annuity proceeds at retirement. Typically, annuitants do this in one of three ways:

  • A lump sum payment – could result in significant tax liability, especially if it moves you into a higher tax bracket
  • Fixed payments for life
  • A fixed amount for a certain period of time

Choosing one of the “fixed payment” alternatives spreads the tax liability over time, because only the earnings are taxed.

Start Saving Now

To find out more about how a non-qualified annuity could be the right tax-deferred retirement savings solution for you, contact a Woodmen of the World Representative today.

1. Woodmen of the World, its employees and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

2. You may be subject to income tax on all or part of the amount withdrawn. In addition, you will pay a 10% federal income tax penalty on earnings you withdraw before age 59-1/2, unless you qualify for an IRA penalty exception.

 

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