Annuities can also accommodate tax-qualified money. A qualified annuity is used to fund a tax-qualified retirement plan, such as a traditional IRA or an HR-10. Thus, in most cases, premiums paid to qualified annuities are tax-deductible – for instance, when clients are changing jobs and have 401(k) funds to move, or already have IRAs and are seeking a more diversified portfolio. They can reduce their portfolio exposure by rolling into an annuity without losing tax advantages.
Or suppose a client inherits $20,000. If she doesn't need the money right away and wants to build a long-term nest egg, she might consider putting the inheritance into an annuity. By doing so, she'll gain the advantage of tax-deferral, and when it's time to withdraw funds from her non-qualified annuity, she will only be taxed on the accumulated interest.
Generally, annuities are not tax efficient vehicles for transferring assets, but are useful in meeting immediate and retirement income needs. Thus, in working with wealth accumulation and retirement planning prospects, remember:
"The only person who can take care of the older person we will someday be is the younger person we are now."
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