What is a Non-Qualified Annuity?

Regardless of the type of annuity account you own (fixed, indexed, immediate, or variable) and based on the type of funds the investor uses to purchase the contract, annuitieswill fall into one of two categories: qualified or non-qualified. While qualified annuities are purchased with either pre-tax dollars or tax-deductible contributions, usually through some sort of employer retirement plan, non-qualified annuities are usually purchased on your own, rather than through a qualified employer sponsored retirement plan or individual retirement arrangement. E.g. if you purchase an annuity with after-tax dollars, then the annuity is considered non-qualified. If, on the other hand, your employer offered this annuity as part of its pension plan, you might be able to purchase the annuity with pre-tax dollars and thus reduce the amount of your taxable income.

Non-qualified annuities aren't governed by the federal rules that apply to qualified contracts, such as annual contribution caps and mandatory withdrawals after you turn 70 1/2. While there may be a 10% tax penalty for withdrawals before you turn 59 1/2, you can generally put up to $1 million in an annuity and postpone withdrawals until you're 75 or 80 or older and because the owners of the non-qualified annuities have already paid taxes on the money they used to invest in the annuity, part of the monthly annuity payments from a non-qualified annuity are considered a return of capital and are not taxable





About this Non-Qualified Annuities page (and the rest of our site).

The California Bar requires that we notify you that this site constitutes Attorney Advertisement. Ask your C.P.A. if you need to someone to make a final call on whether your annuity is qualified or non-qualified. It should be a relatively simple determination.