Exploring Options for Nonqualified Deferred Annuities
November 21, 2024
A nonqualified deferred annuity (NDA) is a flexible type of retirement planning tool that enables you to grow your wealth through tax-deferred strategies. You purchase them with after-tax dollars, and they grow over time to eventually fund your retirement goals.
NDAs are appealing to those who want an additional method to supplement their retirement income and one that offers tax benefits that can enhance their monthly income. Read on to consider how nonqualified deferred annuities could be a vital component of your retirement plan.
What Is a Nonqualified Deferred Annuity?
A nonqualified deferred annuity is purchased after your income is taxed (such as after taxes come out of your paycheck.) They create a pension-like stream of income you can rely on later in life.
The difference between qualified and nonqualified has to do with the tax treatment. A qualified deferred annuity is purchased with pre-tax dollars and then taxed when the funds are withdrawn. A nonqualified deferred annuity uses after-tax dollars, so while there’s no upfront tax benefit, only the growth in value is taxed when you start accessing those funds later.
The tax advantages of NDAs are important to consider. When you begin to withdraw money from your annuity, the money is withdrawn without taxes applied. Only the growth in value is taxed. Many people will be able to count on a lower tax bracket when they are older, potentially reducing some of this tax burden.
The other benefit of NDAs is that they are not limited. Whereas with qualified contributions, you are limited to how much you can deposit annually, that is not the case with NDAs.
Who Should Consider Nonqualified Deferred Annuities?
A variety of people could benefit from the use of NDAs. They provide you with an income for life, and if you have already maxed out your IRA or your 401(k) or 403(b) contributions, NDAs give you another way to save for retirement.
They can also benefit those in a higher tax bracket who want to reduce their taxable income. For many people, a nonqualified deferred annuity is not necessarily an alternative to other retirement strategies but a way to enhance them even further.
Benefits of Nonqualified Deferred Annuities
As you explore investment strategies, a nonqualified annuity offers unique advantages worth considering.
Flexible Contributions
Unlike other retirement accounts with annual IRS-imposed limits, nonqualified annuities allow you to invest as much as you’d like. This flexibility enables you to set aside additional funds for retirement, enhancing your financial security.
Reliable Income Stream
Nonqualified annuities provide a steady income stream in retirement, offering you a “paycheck” when you need it most. In some cases, this income can last a lifetime, giving you dependable financial support throughout your later years.
Considerations Before Investing in an NDA
Like all investment strategies, you need to know the pros and cons of any avenue. Before you choose to invest in NDAs, make sure you know these details.
- Fees and surrender charges: Understand the specific fees associated with opening and maintaining the account, as well as surrender charges if you fail to maintain them and choose to withdraw funds early.
- Risk factors: There are risks to consider. For example, interest rate fluctuations could determine how much your annuity earns in the future.
- The provider: The financial strength of the annuity provider is critical. Choose an organization with a long history of financial well-being.
How To Purchase a Nonqualified Deferred Annuity
Before you move forward, take a few extra steps to ensure you choose the right product for your investment goals.
Choose a provider, such as an insurance company or financial institution, that offers transparency, financial stability, and excellent customer service.
Additionally, know what you want from your annuity. Work with your insurance provider to understand your personal financial needs, including immediate and deferred payment options.
Lastly, ensure you understand all fees and costs associated with the annuity.
Getting the Financial Guidance You Need
Nonqualified deferred annuities allow you to build financial well-being through after-tax contributions. They can provide you with an income stream during retirement that provides you with peace of mind. Find out how well they can work with your other retirement strategies to build your financial future.
At 1891 Financial Life, we specialize in providing tailored insurance solutions that cater to diverse needs. Our team is equipped to help you navigate these challenges with expertise and compassion. Contact us today for personalized assistance and to explore your options.
About 1891 Financial Life
Our culture is about looking out — for you, for others, for family, for the community. That is how we go “Beyond Life Insurance.”
At 1891 Financial Life, we don’t just sell policies, we offer possibilities. We pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. We are a not-for-profit life insurance Society, which means the sales from these financial service products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. In 2023, 1891 Financial Life was listed by Forbes as one of "The World's Best Life Insurance Companies."
Our portfolio is extensive, ranging from various life insurance policies to our annuities to support your financial needs no matter what stage of life you’re in.