INCOME–PRODUCING NON-QUALIFIED ANNUITIES

Many people expect to enhance their retirement with a combination of Social Security and payments from a pension plan. Unfortunately, this is not a realistic plan in many cases. In many cases, Social Security and pension payments will not come close to providing the necessary level of annual income.

An excellent way to supplement the amount accruing on your behalf under an employer-sponsored pension plan is to purchase non-qualified annuities or, if you’re self-employed, use non-qualified annuities as a secondary source of retirement income. The term “non-qualified” means that the payments made to purchase these annuities do not qualify for a current income tax deduction. To receive the maximum tax benefits available to you, it is usually best to make the maximum allowable contributions under your employer sponsored plan before contributing to non-qualified annuities.

Hallmarks of Non-Qualified Annuities
An annuity contract is an agreement between your and an insurance company. You agree to make one or more payments—premiums—to the insurer, who in turn agrees to invest your deposits and provide you with a stream of income—annuity distributions—at a specified time. There are many types of annuities offering a number of options regarding the amount and frequency of both your annuity payments and subsequent distributions. Some of the more notable features of non-qualified annuity include:

Tax-Deferred Income. Because an annuity is an insurance contract, any interest or investment return your deposits earn is tax deferred until withdrawn—a feature that can result in a larger retirement fund.

Unlimited Premiums. Since the principal invested in a non-qualified annuity has already been taxed, there's no limit to the amount you can invest. So, most people can defer a greater amount of investment earnings from current taxes.

1. Potential Charges and Penalties. Virtually all annuities are subject to both (1) surrender charges from the issuing insurance company if you begin to withdraw before a specified time period (usually 6 to 10 years) and (2) IRS penalties if you make withdrawals before you reach age 59 ½.
   
   
2. Death Benefit Protection. Most annuities provide that a death benefit will become payable to your beneficiary. Under such a feature, no surrender charges are imposed on the death benefit that your beneficiary receives.
   
   
3. Distribution Flexibility. Under a qualified annuity, you must begin taking distributions after you turn 70 1/2. If you have accrued a substantial retirement income, this could suddenly create a large tax burden. A non-qualified annuity allows you to defer payment for as long as you wish, without any federal restrictions.

Types of Annuities
Although there are many categories of annuities, there are two primary distinctions: fixed and variable.

Under a fixed annuity, the rate of return you earn is calculated using a “fixed” rate that is reset periodically (usually annually) subject to a guaranteed minimum interest rate. Because fixed annuity rates remain in force for a pre-determined period, you will not immediately feel the impact—whether positive or negative—of sudden fluctuations in the markets.

Under a variable annuity, you direct your premiums to one or more of a selection of investment portfolios—e.g., stocks, bonds and short-term instruments— made available under the contract and the rate of return you earn fluctuates with the earnings of the underlying securities in the investment portfolio(s) you select. As a result, your annuity balance is directly and immediately impacted by market fluctuations—both positive and negative. Most variable annuity portfolios do not offer any guarantees and your degree of risk depends on the type of portfolio you select. Most variable annuities do allow you to reallocate your assets among different types of investment portfolios without incurring current taxes.