Are Annunity Distributions Qualified Private Retirement Benefits?
Guaranteeing your retirement income through an annuity allows you to worry about something other than generating sufficient income during your retirement. However, you may still have to worry about taxes on the amounts being distributed. Depending on how the annuity is structured, distributions may or may not be considered qualified retirement benefits.
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Qualified Annuities
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Qualified annuities are annuities inside of a traditional IRA or a Roth IRA. These annuities are subject to the contribution rules imposed on qualified accounts. A qualified annuity is an annuity that meets the IRS requirements for additional tax benefits over and above the benefits given to annuities in ordinary circumstances.
For traditional IRA annuities, you will be taxed on all money distributed from the plan. These distributions are taxable qualified distributions. Distributions from Roth IRAs are not taxable, since Roth qualified distributions are income tax-free.
Non-Qualified Annuities
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Non-qualified annuities are annuities not purchased inside of a qualified account. Annuities which are non-qualified do not receive the benefits inherent in qualified retirement accounts. All distributions from the annuity are taxed to the extent that gains are realized. Ordinary annuity withdrawals are taxed as though you are withdrawing investment gains first before you withdraw investment principal. Immediate (or guaranteed) annuity payment distributions are treated as primarily a return of principal with a small amount of interest added to the payment.
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Benefit
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The benefit to qualified retirement annuities is that the annuity receives additional tax benefits over non-qualified annuities. A qualified a qualified annuity may result in a larger total retirement savings or more net income from the plan depending on the type of qualified plan involved with the annuity.
A non-qualified annuity benefits from the fact that there are no contribution limits. You may contribute as much money as you want to a non-qualified annuity, which won't limit how much money you can put towards your retirement.
Disadvantage
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The disadvantage to a qualified plan is that it limits your ability to save money. In most cases, your IRA is limited to $5,000 annual contributions. You may contribute up to $6,000 annually if you are 50 or over. This, in turn, may reduce the total amount of money that can be distributed from the annuity. On top of that, some qualified annuities (i.e., traditional IRA annuities) must start making distributions from the account when you turn age 70 1/2.
The disadvantage to non-qualified annuity distributions is that you simply do not receive the tax benefits available with qualified annuities. The non-qualified annuity only accepts non-deductible contributions and taxes all investment gains when you withdraw the money from the account. This may result is both a lower total account balance and lower net income when compared to qualified accounts.
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