Annuities promise guaranteed future payments from the insurance companies that sell them. But if you need funds sooner, annuity financing is a useful tool for transforming annuities into immediate financial help. Annuity financing can help you keep possession of your annuity while still handling unexpected expenses or pursuing business ventures.
To make the most of this financing option, it’s useful to understand what non-qualified and qualified annuities are, plus the methods for unlocking short-term cash via an annuity.
Qualified vs. Non-Qualified Annuities
Qualified annuities generally are found in workplace retirement plans. Pre-tax dollars contribute to their funding. When they begin paying out income, that income is taxed. Meanwhile, non-qualified annuities receive their funding from post-tax dollars.
Non-Qualified Annuity Financing
Non-qualified annuity financing is a loan from your annuity you’ll pay back over time. You’ll first need to determine if the insurance company allows annuity loans, then apply. If you’re approved, review the terms carefully to make sure you can keep up with the repayment schedule. If you accept the offer, you’ll have quick access to a lump sum of cash.
Qualified Annuity Financing
Qualified annuity financing works similarly to non-qualified annuity financing, but to avoid taxes and penalties, you may need to meet certain guidelines, such as paying the loan back within a short time. Borrowing from a qualified annuity may lead to an undesirable tax loop, too: You’ll repay the loan with income that has been taxed, then pay taxes once again on the income the annuity pays out down the line.
Using Annuities as Collateral
Another annuity financing method is using an annuity as collateral to secure a bank loan. However, the IRS will levy taxes, plus a penalty if you’re younger than 59 and a half. Annuities that are part of a retirement plan are off-limits for collateral purposes, meaning qualified annuities generally won’t work.
Want to go over your financing options? Speed Funding’s pros are eager to hear from you.