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How To Know if Your Annuity Is Qualified

How Do I Know if My Annuity Is Qualified

Let’s start by explaining what a qualified annuity is exactly. It's an annuity where you've used funds that has not been taxed like your traditional IRA, which leads me to a little bit of a rant. I get very sick and tired of stock-type advisors, fee-only advisors, and people who don't know our darn thing about annuities saying to never put an annuity inside of an IRA. Of course, annuities can be used inside of an IRA qualified. Why? Because you're buying it for the contractual guarantees.

The latest annuity type developed in 2014 is called a qualified longevity annuity contract and can only be used in a qualified account. For all you masters of the universe that do not like Stan The Annuity Man spewing the truth out here, yes, annuities can be used in IRAs. Yes, annuities can be used in qualified accounts. You would use them because you're buying them for the contractual guarantees. You own them for what they will do, not what they might do.

A non-qualified annuity is an annuity where you use the funds from a non-IRA type asset, like a checking account, a banking account, a savings account, or a brokerage account that's not an IRA. The key is because the contractual guarantees are the same; once you take money out of the annuity, the taxation of that money depends on whether it's non-qualified or qualified. Can a qualified annuity be jointly owned? No, they can't. But that doesn't mean Martha or the partner/spouse will not be a part of it. In an IRA, you, the owner of that IRA, can own the annuity, but you can choose to add your spouse or partner. Chester could choose to add Martha to the annuity payout, also known as being a joint annuitant. The annuitant is the payee, but in that scenario, only you, the IRA owner, can own the annuity.

Do you have to pay taxes on your non-qualified annuity? The answer is yes when you take the money out. If you have an immediate annuity that's in payment form in a non-qualified, non-IRA account, you're paying taxes on the interest portion of that lifetime income string. But if you have a multi-year guarantee annuity or a fixed indexed annuity or variable annuity, and those are kind of deferred annuities under that category deferred annuities, you can defer those gains, and you can just let it grow for as long as you want in a non-qualified setting. But when you take the money out, you have to pay taxes on that money, and it's taxed at ordinary income levels. Last in, first out, LIFO.

The latest annuity type developed in 2014 is called a qualified longevity annuity contract and can only be used in a qualified account.

Ultimately, you don't even need to know the type to decide if your annuity is qualified. If you haven't been paying taxes on the gains, it's qualified. Traditional IRA, rollover IRA, 403B, and 457 are all account types we handle at and are considered qualified. Those are also considered retirement-type accounts that you have to pay taxes on when you bring the money out. You've been adding to it, adding to it, adding to it, but when you finally take it out, you're going to have to pay taxes on it. That doesn't mean you need to have an annuity inside your qualified account, but it does mean that you can have one in there if it's suitable and appropriate for you.

Remember, ask yourself two questions and remember the acronym PILL before buying. What do you want the money to do contractually? When do you want those contractual guarantees to start? The PILL acronym is principal protection, income for life, legacy, and long-term confinement care. If you don't need to solve one or more of those four problems, you do not need an annuity, whether it's non-qualified or qualified.

You buy an annuity for the contractual guarantees of what it will do, not what it might do. You'd never buy an annuity for the hypothetical, theoretical, projected back-tested hope that unicorns are chasing the butterflies scenario that's being pitched. Never buy the dream because you're going to own the contractual realities. But with that being said, the contractual realities of annuities might fit your situation using qualified money.

Never forget to live in the reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.