Qualified vs. Non Qualified Annuities
Money used in a qualified account are dollars that have not yet been taxed. Taxes are paid only when distributions are taken. A penalty will apply when money is withdrawn from a qualified account before the investor has reached the age of 59 and a half. If the investor decides to withdraw his or her money before the age of eligibility, a 10% penalty would be deducted on the amount taken as will be taxed as regular income. In some unfortunate events, regular income tax rates are much higher than that of the capital gains tax. Annuities, deposits or funds are all taxable at regular income rates as long as they are distributions from qualified accounts.
Non - Qualified Annuity
A non-qualified can be purchased with dollars that have already been taxed. Only interest coming from the earnings will be taxed. This is due to the fact the money used for the annuityhas been taxed prior to purchasing. The primary advantage is that, while in deferral, the client will not pay taxes on the growth. Purchasing a fixed annuity is a better option for those who want to earn a fixed stream of income.
If you are interested in an annuity, another thing to do is go to a financial consultant. They can give you ideas on which type of annuity would be most suitable.
Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.