Nonqualified Variable Annuities
Some of the factors that distinguish these variable annuities, sometimes described as nonqualified annuities from other retirement planning tools are:
- The opportunity to receive lifelong income and to begin taking that income on your own schedule
- The flexibility to contribute unearned income
- The opportunity to put away more than the annual limit imposed on qualified plans
Since you don't need to earn income to put money into a nonqualified variable annuity, you can fund the annuity by contributing money you inherit, receive as a lump sum, or realize from your investments.
CHOOSING YOUR DIRECTION
Buying a nonqualified variable annuity, which is sometimes called a flexible premium annuity, involves making choices, but also gives you some control over the direction of your long-term retirement savings.
The more you understand about how an annuity works, the more informed a choice you'll be able to make in selecting the best contract for you, as well as appropriate separate account funds within the contract.
Of course, if you prefer, you can buy a fixed annuity and not make any additional decisions, especially if you're making a one-time purchase. People who feel overwhelmed by financial matters or who are looking for a stable, guaranteed source of income may choose to take that approach.
But if your preference is to be actively involved in investment decisions that affect your financial security, you have the opportunity with a variable annuity to allocate your assets, monitor their performance, and change that allocation when it seems wise.
You allocate your variable annuity premiums among different separate account funds, sometimes called investment portfolios or subaccounts, each managed by a specialist, or team of specialists, who make buy and sell decisions based on their analysts' research. That means you don't have to shoulder responsibility for that level of decision-making. You should, however, evaluate the past performance of these portfolio managers in making investment decisions, as well as keep track of the performance of the separate account funds themselves. You can find that information in the prospectus your annuity company provides for each separate account fund and in many cases in independent research provided by firms such as Morningstar, Inc., Standard & Poor's, and Lipper.
FLEXIBLE TIME LINES
Another advantage of nonqualified variable annuities is that there are fewer rules about how long you can continue to add money and when you must take it out. With most qualified retirement plans and IRAs, you can put money in only as long as you have earned income and there are annual limits on what you can contribute. In addition, you must begin taking income in the year following the one in which you turn 70½. With nonqualified annuities, on the other hand, you can build your account whether or not you're earning income, and you can often postpone withdrawals to age 85 or later.
There are no federal or state limits on the amount of after-tax income you can add to your variable annuity each year, though an individual contract may have a ceiling. That's in direct contrast to what you can put into IRAs and employer-sponsored retirement plans.
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