Annuities

What is an Annuity?   What is an IRA?   What does Tax-Qualified mean?

Defined

 Annuities are unique investment products, sold by insurance companies, that can help you save more for retirement, generate a guaranteed stream of income in retirement, or both. Annuities have helped millions of people prepare for retirement, but because there are different types with different purposes, they can be a bit confusing. Keep in mind, annuities generally fall into two distinct categories: tax-deferred and income.

IRA Individual Retirement Account, a private retirement account as defined by the United States Internal Revenue Code.

Annuities are classified in a number of different ways. For federal tax purposes, annuities are classified as either qualified or nonqualified. A qualified annuity is purchased as part of, or in conjunction with, an employer provided retirement plan or an individual retirement arrangement (such as an Individual Retirement Annuity or a Simplified Employee Pension Plan). If certain requirements are satisfied, contributions made to qualified annuities may be wholly or partially deductible from the taxable income of the individual or employer making the contributions.

A nonqualified annuity is not part of an employer provided retirement program and may be purchased by any individual or entity. Contributions to nonqualified annuities are made with after-tax dollars and are not deductible from gross income for income tax purposes.

What's the difference between a qualified and a non-qualified annuity?

Qualified is the IRS's way of saying that the annuity is funded with pre-tax dollars. An annuity that is funded with pre-tax dollars means that the contribution may qualify as a tax deduction, which could lower current taxable income. When a distribution is taken from a Qualified annuity, the entire distribution amount will be subject to ordinary income taxes.

A Non-Qualified annuity is funded with after-tax dollars. Funding an annuity with after-tax dollars will mean that only the portion of the distribution that comes from earnings is taxed upon distribution, not the entire amount.