Decoding Non-Qualified Variable Annuities

Shawn Plummer

CEO, The Annuity Expert

Let’s be frank. Navigating the labyrinth of retirement investment options can seem like a daunting task. But among these many choices, one financial product stands out for its flexibility and potential for growth: non-qualified variable annuities. This guide aims to demystify non-qualified variable annuities’ complexity, giving you the knowledge and confidence to make informed decisions about your financial future.

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What Are Non-Qualified Variable Annuities?

A non-qualified variable annuity is a type of investment vehicle that allows your money to grow on a tax-deferred basis. Unlike qualified annuities, which come with contribution limits and require funds from pre-tax dollars, non-qualified annuities have no such restrictions.

Example: Suppose you’re a successful freelance designer, earning well above the average income. After meeting your living costs, you have considerable disposable income each month. You’ve already maximized your contributions to tax-advantaged retirement accounts like your IRA and 401k but still wish to invest more for your retirement. Here, a non-qualified variable annuity comes into play, allowing you to invest that surplus money on a tax-deferred basis.

Non-Qualified Variable Annuities

Tax Advantages

For example, let’s say you’ve maxed out your contributions to your 401k or IRA for the year. A non-qualified variable annuity would allow you to continue investing, and the tax-deferred status means you wouldn’t owe taxes on your earnings until you withdraw them.

Example: Think of it this way: if you decide to invest $10,000 in a non-qualified variable annuity and it grows to $15,000 over a few years, you won’t owe any taxes on the $5,000 gain until you start withdrawing the money. That’s the tax advantage of a non-qualified variable annuity.

How Non-Qualified Variable Annuities Work

Unlike fixed annuities, the value of a non-qualified variable annuity can fluctuate based on the performance of the underlying investments, hence the term ‘variable.

Example: You’ve invested in a non-qualified variable annuity with a portfolio of various mutual funds (the subaccounts). Now, if these funds perform well, the value of your annuity increases, providing a better return on your investment. Conversely, if the funds do not perform well, the value of your annuity decreases.

Investment Options and Risks

Non-qualified variable annuities are often invested in subaccounts, similar to mutual funds, offering you a wide range of investment options. However, with the potential for greater returns comes an increased level of risk. Understanding your risk tolerance and long-term financial goals is essential when considering non-qualified variable annuities.

Example: If you’re a risk-averse investor, you might lean towards investing in bond funds within your annuity. However, if you’re more comfortable with risk, you may choose to invest in stock funds. The risk and potential return go hand in hand, making it essential to choose investment options that align with your risk tolerance and financial goals.

Non-Qualified Variable Annuity

The Payout Phase of Non-Qualified Variable Annuities

Once you’ve decided to start receiving payments, your non-qualified variable annuity enters what is known as the annuitization phase.

Income Stream

One of the most appealing features of a non-qualified variable annuity is the ability to provide a steady income stream during retirement. This income can last for a specified period or continue for the rest of your life, regardless of how the underlying investments perform.

Example: Suppose your non-qualified variable annuity contract promises you $1,000 monthly for life. This means that no matter how long you live, you will continue to receive that $1,000 every month, helping to alleviate the fear of outliving your savings.

The Potential Downsides of Non-Qualified Variable Annuities

Like any financial product, non-qualified variable annuities aren’t without their caveats. It’s crucial to understand these potential pitfalls before making a decision.

Non-Qualified Variable Annuities

Fees and Charges

Non-qualified variable annuities can come with various fees, including surrender, mortality, and expense risk charges. Understanding these fees and how they can impact your investment is crucial in deciding if a non-qualified variable annuity is the right choice.

Example: In addition to surrender charges, there might be administrative fees, mortality and expense risk charges, fund expense charges, and possibly more. For instance, if your non-qualified variable annuity charges a mortality and expense risk charge of 1.25%, you would pay $1,250 annually for every $100,000 invested. These costs can add up and diminish your overall returns. Understanding and factoring in all these potential fees is essential when considering a non-qualified variable annuity.

Next Steps

Non-qualified variable annuities can be a versatile and valuable tool in your retirement planning arsenal. They provide tax-deferred growth, a wide range of investment options, and the potential for a lifelong income. However, as with any investment, they also come with risks and costs that must be carefully weighed against potential benefits. By understanding non-qualified variable annuities, you can make an informed decision, shaping a more confident and secure financial future. Your future self may thank you.

What Are Non-Qualified Variable Annuities

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What is the difference between non-qualified variable annuities and a variable annuity?

Non-qualified variable annuities offer tax deferral but are not subject to the same rules and regulations as a qualified variable annuity. Non-qualified variable annuities allow investors to contribute without meeting specific IRS requirements for annual contribution limits or other restrictions, making them more attractive to those looking for flexibility.

Are the fees higher with a non-qualified variable annuity?

Due to less regulatory oversight, non-qualified variable annuities often have higher fees and expenses than qualified variable annuities. There are also typically more restrictions on contributions and withdrawals for non-qualified variable annuities, which could add additional costs.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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