How to Set Up a Nonqualified Annuity

A nonqualified annuity is a contract you make with an insurance company to provide a certain amount of income for a designated period. Unlike a qualified annuity, you do not need to set up this particular annuity with an employer. Instead, you can establish it on your own. During the time you contribute to the annuity, you'll receive tax-deferred earnings on contributions.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Funds for the annuity

Learn to Set Up a Nonqualified Annuity

1. Set up a nonqualified annuity when you want to contribute more toward your retirement than you are allowed under your employer-sponsored plan. There is no maximum contribution amount for these types of annuities.

2. Select an insurance company for your annuity. Go with an insurance company with a good reputation and great customer service. Although insurance is heavily regulated, it doesn't hurt to research an insurance company with your state's insurance commissioner before you invest your savings.

3. Get a free consultation from a licensed insurance agent. You can usually fill out a form online and then wait to be contacted by phone or in person.

4. Choose a fixed, nonqualified annuity when you want to ensure that you receive a particular interest rate for a selected period of time.

5. Work with a professional who knows the financial, legal and tax ramifications of an annuity. There are a number of different savings investments and you want to ensure that you choose the best one for your individual situation.

6. Remember that the nonqualified annuity is purchased with after-tax dollars and will not reduce your gross income for the purpose of income-tax savings.

7. Plan to keep your nonqualified annuity until you are 59 1/2 years old. If you make an early withdrawal of the funds, you will be subject to a 10-percent tax penalty on the monies you have withdrawn. There may be circumstances in which this penalty does not apply, such as if a serious illness occurs.

8. Name a beneficiary who will receive the remainder of any unused annuity payments at the time of death. This person will receive this amount either in a lump sum or spread over a specific number of years.

9. Discuss the amount you want to invest and the method by which you will pay your premiums. Companies now offer electronic deposits as well as conventional methods.

Tips & Warnings

• Unlike other types of retirement accounts, you do not have to begin making withdrawals from the annuity at age 70 1/2. Make your own decision on when payments will begin based on your unique circumstances.
• Be sure to learn your options. You are not limited to securing an annuity for an individual. You can also contract for your partnership, corporation or trust.
• Remember to make any beneficiaries to your annuity aware that they will be taxed on the amounts left to them from your annuity.