When preparing a financial plan, providing for your family and loved ones is often a top priority. A non-qualified stretch annuity is one way to give your beneficiaries the advantages of an annuity in their lifetime.
What Is a Non-tax Qualified Annuity?
A non-qualified annuity is funded using after-tax dollars, unlike qualified annuities that use pre-tax dollars. Non-qualified stretch annuities are annuities that can be extended over multiple generations.
Financial strategies that aim to prolong the tax-deferred status of an account are frequently referred to as "stretch." A non-qualified stretch annuity table will differ based on the terms of your annuity contract.
How Do Non-qualified Stretch Annuities Work?
To establish a non-qualified stretch annuity, you need to designate a beneficiary. Upon your death, beneficiaries can receive either the required minimum distributions (RMDs) over their lifetime or a lump sum payment. The non-qualified stretch annuity allows the beneficiary to "stretch" the distributions over their lifetime, providing potential tax benefits.
Suppose you are an annuity owner and you pass away, leaving the asset to your three children. A non-qualified stretch annuity RMD table would show that each child would receive payments based on their life expectancy. If you have grandchildren, then they may receive funds as well.
Regarding non-qualified stretch annuities, it's important to know the tax implications. The earnings are taxed as ordinary income once you withdraw from a non-qualified annuity. Non-qualified stretch annuity distribution rules dictate that beneficiaries will pay taxes on the withdrawals at their regular income tax rate.
What Are the Benefits of a Non-Qualified Annuity?
These are the key advantages of a non-qualified stretch annuity that you should consider as a high-net-worth individual. With an inherited non-qualified stretch annuity, these advantages can be helpful in your estate planning.
Tax-Deferred Growth
A non-qualified annuity, also known as a non tax-qualified annuity, is an annuity you fund with after-tax dollars. This means the tax-deferred growth offered by a non-qualified stretch annuity is a significant advantage.
Non-qualified annuity stretch rules allow beneficiaries to only pay taxes on any earnings generated, such as interest, dividends, or capital gains, until they are withdrawn. This enables beneficiaries to make the most out of the investment returns and potentially accumulate more wealth over time.
No Contribution Limits
Non-qualified annuities do not have contribution limits, unlike qualified retirement accounts that are bound by annual contribution limits set by the IRS. If you've already reached the maximum contribution limit for your qualified accounts, using tax-deferred investment options can be a smart move. This allows you to continue investing while enjoying the benefits of tax deferment.
Easier Wealth Transfer
The non-qualified stretch annuity empowers you to easily transfer wealth. Allowing the original owner to designate their children or grandchildren as beneficiaries helps to reduce estate taxes and simplifies asset transfers after the owner’s death. With a non-qualified stretch annuity, you can confidently plan for the future.
Can You Cash Out a Non-Qualified Annuity?
If you decide to withdraw funds from a non-qualified stretch annuity before reaching the age of 59½, there's an additional hurdle to overcome. You may be subject to a 10% early withdrawal penalty on the earnings portion of your withdrawal. This penalty is similar to what you would face for early withdrawals from qualified accounts.
However, there are some exceptions to this penalty. If you become disabled, or need the funds for major purchases like a first home or unexpected medical expenses, then you can avoid it. There is also the SEPP provision that allows you to avoid the penalty by withdrawing multiple equal payments over a period.
What Happens When a Non-Qualified Annuity Matures?
Once a non-qualified stretch annuity reaches its maturity date, the outcome can vary based on the annuity contract terms.
When a non-qualified stretch annuity reaches maturity, you can annuitize the contract. When an annuity reaches maturity, the total value is transformed into a series of regular payments. These payments can continue for a set number of years or last for as long as you live. With a stretch annuity, these payments can be extended over your beneficiaries’ lifetimes.
Suppose the contract does not impose any obligation for a payout or other actions at maturity. In that case, you or your beneficiaries can let the annuity grow tax-deferred. Make sure to thoroughly read any charges, fees, or tax implications that may arise when considering the different options available at maturity. Working with a financial planner can help you make the right choices for your situation.
Create a Holistic Plan for the Future
Non-qualified annuities are complex financial products, but understanding their features, fees, and penalties is crucial. It is always wise to seek the advice of a knowledgeable financial advisor or tax professional before purchasing an annuity. At Asset Preservation Wealth and Tax, our expertise will ensure you make informed choices that support your goals for your family’s future.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
