Advanced Questions

• How can annuities enhance my portfolio?

In a word: diversity. Any financial advisor will tell you that the more diverse your holdings, the better your assets are protected against risk. Annuities can provide varying levels of risk, depending on the type of annuity, but all annuities are equity vehicles, i.e., you own part or all of the asset (as compared to debt instruments, where you owe another entity). This is because annuities are products which you purchase, not funds in which you invest. You purchase the annuity contract from an insurance company, and that company in return pays you according to the terms of the contract.

• Explain “qualified” and “nonqualified”.

Qualified means the annuity is purchased using before tax dollars under one or more plans defined as qualified by the Internal Revenue Code (e.g., IRA, SEP, HR10, TSA, 401k, or other qualified pension plan). Contributions into one of the qualified plans are currently tax deductible, and taxes are payable on the full account at the time the funds are distributed. Nonqualified means the annuity is purchased using after tax dollars (i.e., taxes have already been paid on the funds invested). In other words, these are funds you have earned and already paid income tax on. These funds are allowed to accumulate on a tax deferred basis.

• Can annuities fund qualified plans like IRAs?

Yes. Annuities may be purchased on either a nonqualified basis or a qualified basis.
 

• Do I have to withdraw funds from a qualified or nonqualified annuity?

Yes for qualified, and no for nonqualified. If you have an IRA, 401k, SEP-IRA or SIMPLE Plan, you are required to begin minimum required distributions by age 70½. In the calendar year in which you reach age 70½, you must make your first withdrawal by the time you reach age 70½. In subsequent years, you must make the withdrawal by the end of each calendar year. The required minimum distribution is based upon your life expectancy or upon the joint life expectancy of you and your beneficiary. These life expectancies are set forth by the IRS. Failure to make the required minimum distribution by the time required results in a penalty equal to 50% of the amount of the required withdrawal or distribution. Of course, ordinary income taxes are due on the entire amount of the withdrawal or distribution, as the amounts you contributed were deductible on your income tax. With a nonqualified annuity, there is no requirement to withdraw your funds at any age except as may be required by the annuity contract itself, which may force a distribution or annuitization at a certain age, typically age 100. However, many annuity contracts issued on a nonqualified basis do not require distribution of the proceeds until death. If you choose, you can leave the funds in your annuity to your beneficiary. Upon your death, the proceeds will be distributed to your beneficiary as follows: If you annuitize your contract and begin receiving an income and then die, the payments to your beneficiary must continue at the same rate or faster. If you die before you annuitize the contract, and your spouse is the beneficiary, the annuity contract may be continued with your spouse as the new owner. No distribution of the proceeds is required. If you die before you annuitize the contract, and the beneficiary is someone other than your spouse, the beneficiary has two choices: (1) the entire value of the contract must be distributed in a lump sum within five years of your death; or (2) your beneficiary may elect to begin distribution of the proceeds within one year of the date of your death based upon his or her life expectancy or at least a minimum of five years. The proceeds of an annuity are taxed to the beneficiary in the same manner as they would be for you, i.e., the gain in the contract is considered ordinary income, but is not subject to the 10% tax penalty even if distribution occurs before the beneficiary is age 59½. Proceeds that are taken under an annuitization payout option are taxed in the same way as annuity payouts under an immediate annuity.

	Lincoln Financial Group
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	BlueCross BlueShield
Blue Cross and Blue Shield of Texas is the only statewide customer-owned health insurer in Texas.

	The Hartford
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