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What Annuity Owners Need to Know About Qualified vs. Non-Qualified Plans

When people buy an annuity to save for retirement, one option is to do so through their employer in either a qualified or non-qualified plan.

Key things to know about qualified and non-qualified plans:

  • Contributions are either made pre-tax or post-tax, depending on the plan type.
  • All annuities provide tax-deferred growth — you don’t pay any taxes on earned interest until you withdraw money from the annuity.
  • Retirement distributions are either taxable or tax free, depending on the plan type.
  • With some plan types, you can take a loan against your policy (if the employer plan allows). With other plan types, like a Traditional IRA, loans are not allowed.
  • All plans may be subject to early withdrawal penalties.

 

What is the difference between a qualified plan and a non-qualified plan?

Qualified plans meet the guidelines set by the Employee Retirement Income Security Act (ERISA) and must be made available to all eligible company employees. These plans are subject to strict regulations to protect employees’ retirement savings to ensure no discrimination takes place.

Non-qualified plans are not required to meet all ERISA guidelines, allowing for selective participation. Non-qualified plans can be used to provide additional benefits to key employees.

 

What are key characteristics of a qualified plan?

  • Earnings grow tax deferred until you withdraw money.
  • Annual contribution limits and strict withdrawal rules set by the IRS, including penalties for early withdrawal (before age 59½) and required minimum distributions (at 70 ½-73, depending on date of  birth).
    Examples of qualified plans:
    • 401(k) plans
    • 403(b) plans
    • Profit-sharing plans
    • Defined benefit pension plans

 

What are key characteristics of a non-qualified plan?

  • Earnings grow tax deferred until you withdraw money.
  • Can be used to provide additional benefits to key employees or executives.
  • More flexible withdrawal options.
    Examples of non-qualified plans:
    • Deferred compensation plans
    • Executive bonus plans

 

How do you know what kind of plan you have?

If you bought an annuity through National Life Group, you probably have one of these plan types:

  • If you’re a teacher or an employee of a public school or a non-profit organization, you may have a 403(b) plan.
  • If you work for a tax-exempt organization or for a state or local government, you may have a 457(b) plan.
  • All others who have bought a National Life Group annuity through a retirement savings plan likely have a Traditional IRA or a ROTH IRA plan, or a non-qualified annuity.

 

Why should you care about the plan type?

If you have an annuity with National Life Group bought through an employer, key things to consider include:

  • Tax implications related to contributions and withdrawals.
  • Whether you can take a loan against your policy. (Note that if you take a loan, it will be considered a distribution if you don’t repay the loan.)

Here’s an overview of common plan types and how they differ:

Tax-Qualified Plan Type
Pre-Tax Contribution Tax-Deferred Growth Retirement Distributions Loan Availability
403(b) Yes All Distributions are Taxable Yes, if Plan Allows
457(b) Yes All Distributions are Taxable Yes, if Plan Allows
401(k) Yes All Distributions are Taxable Yes, if Plan Allows
401(a) Yes All Distributions are Taxable Yes, if Plan Allows
Traditional IRA Yes All Distributions are Taxable No
SEP IRA Yes All Distributions are Taxable No
SIMPLE IRA Yes All Distributions are Taxable No
Pension Plan Yes All Distributions are Taxable No
After-Tax Contribution
Roth 403(b) Yes Not Taxable Yes, If Plan Allows
Roth 457(b) Yes Not Taxable Yes, If Plan Allows
Roth 401(k) Yes Not Taxable Yes, If Plan Allows
Roth IRA Yes Not Taxable No
Roth SEP IRA Yes Not Taxable No
Roth SIMPLE IRA Yes Not Taxable No
Non-Qualified Annuity Yes Only Gains Are Taxed No

 

 

If loans are allowed, should I take a loan instead of withdrawing money from my annuity when I need cash?

Whether you should withdraw money or take a loan depends on your specific situation and needs. Here are some of the pros and cons of both options:

Loans Withdrawals
Pros
  • Easy to get, no approval needed.
  • Not taxable as income if the loan is repaid.
  • Limited by cash surrender value and outstanding policy loans.
  • Accumulated value still earns interest. The loan interest is fixed for one year.
  • No bonus recapture for bonus products
  • Use the funds for whatever purpose.
  • Easy to get, no approval needed.
  • Limited only by cash surrender value.
  • No interest due and no repayment is required.
  • Use the funds for whatever purpose.
  • May have the option of an annual 10% free withdrawal, starting in year 2.
Cons
  • Loan payments are required.
  • Loan interest due is paid to National Life Group and does add to the value of the annuity. 
  • Defaulted loans are considered distributions, subject to taxes, charges, and a possible tax penalty.
  • Withdrawal amount no longer earns interest.
  • Possible bonus recapture for bonus products. 
  • Surrender charge
  • Withdrawals are taxable distributions, subject to taxes, charges, and a possible tax penalty.

 

I have taken a loan in the past — how can I make a repayment?

Loans can be repaid at any time using the mobile app, online customer portal, or by sending in a payment. Important: Payments intended for repaying a loan should be clearly marked as such. Otherwise, they will be considered premium payments.

 

Next Steps

 

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