All annuities fall into one of two categories — qualified and non-qualified — which differ in how the funds are taxed.
The Difference Between Qualified and Non-Qualified Annuities
Annuities are long-term investment vehicles used to protect financial assets and secure financial futures. While they come in many forms including fixed, variable, deferred and immediate, annuities fall into one of two main classifications: qualified and non-qualified. These two categories of annuities determine how contributions or withdrawals from the accounts are taxed.
- IRA accounts
- 401(k) plans
- 403(b) plans
- Simplified Employee Pension (SEP)
- Tax exempt savings plans
Because a qualified annuity was purchased with pre-tax dollars, all withdrawals are taxable. Qualified annuity earnings can also be rolled over into a similar account without causing any excess tax liability.
A non-qualified annuity is a privately purchased annuity bought outside of an employee benefit. The funds used to buy this account have already been taxed, so the initial investment is not subject to taxes once disbursed. Some common sources of funds for non-qualified annuities include:
- Mutual funds
- Non-IRA accounts
- Certificates of deposit
- Inheritance accounts
- Savings accounts
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