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The Plain English Attorney

An annuity by simple definition is an insurance investment used for creating an income stream for a set amount of time or the rest of a person’s life.   Although annuities have only been around in their present form for a few decades, the idea of paying out a stream of income to an individual or someone’s family can date back to Roman times.  In the reign of emperors, investors made a single payment into an “annua” and received annual stipends for the rest of their life.

Modern annuity plans can protect against things like disability, long term care, economic crashes, market volatility, and can also serve as tax shelters for wealthy individuals whose income may not allow them to contribute to other retirement vehicles such as Individual Retirement Accounts (IRA’s).

When funding an annuity there are many places someone can transfer or move money from to place into the annuity plan: bank accounts, CD’s, money markets, stocks, bonds, mutual funds, 401ks, 403bs, etc…  The financial vehicles are vast.  The fact is all of these types of accounts break down to two very distinct categories: qualified or non-qualified. Simply put, before and after tax dollars.

Non-qualified annuities — where the money placed into the contract has not been taxed by the IRS — have tax deferral advantages over other non-qualified accounts such as what your local bank or credit union may offer.  A fixed annuity offering a 3% annual rate of return for 5 years would compound interest over the 5-year period without any tax bills.  A bank or credit union account such as a CD or money market offering a similar rate of return would generate a tax bill once a year if your income requires you to pay taxes.  The result being less earned in the accounts and, if large enough, interest reported to the IRS that bumps up your tax bracket.

Qualified annuities — where the money is placed in the contract before being taxed — follows IRS guidelines for retirement accounts with the same tax deferral advantages of non-qualified annuities.  Annuities can be used for: IRA’s, 401k’s, defined benefit plans, executive bonuses, and other retirement accounts.  One distinct advantage of qualified annuities over non-qualified is the tax deduction on income and revenue for wealthy entrepreneurs, self-employed contractors, and business owners.

By using qualified annuities as alternative retirement vehicles aside from 401k’s and IRA’s, self-employed and business owners can enhance wealth accumulation with higher tax deductible contributions.


If you are interested in learning more about life insurance as part of retirement income, please contact The Care Assistance Center, LLC for more information. We have kind and helpful staff here to help: (919) 518-8237.



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