Non-Qualified Annuities

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A non-qualified annuity is an annuity purchased with funds that do not qualify for tax-exemption or tax-deferment. An annuity is a contract purchased with a specified amount of funds that is then paid back to the annuitant over a specified period of time. Annuities work much like loans in that a large amount is paid to an annuity seller then paid back to the annuitant in level payments over a period of time with interest. These annuities can be paid for over time or in a lump sum towards retirement. Non-qualified annuities can have monies originating from funds such as the following:

• Investments and mutual funds that do not qualify as IRA or retirement savings accounts
• After-tax savings accounts or money market accounts
• Certificates of Deposit (CDs)
• Proceeds from the sale of a house, estates, or other property
• Inheritance or Life insurance settlement proceeds
• Any other investment or money amount that has already been subjected to government and state taxes

Payments

Annuities are typically considered a type of income once they begin paying out after retirement. Therefore, the annuity payments are usually subjected to tax rules by government and state. Since a non-qualified annuity is funded by money already subjected to taxes, no taxes are applied to the principal paid back to the annuitant. Interest on the annuity, however, is subject to taxes.

Qualified Annuities

In contrast, qualified annuities are purchased with investments and monies that qualify for tax-exemption and tax-deferment. These funds typically originate from retirement funds such as 401(k) plans or IRAs. Since the funds used to purchase a qualified annuity are not subject to taxes before the annuity is purchased, all the payments from the annuity to the annuitant are taxed based on government and state income tax laws.

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