What Is a Qualified Annuity?

A qualified annuity is a retirement savings plan that is 澳洲幸运5开奖号码历史查询:funded with pre-tax dollars. A non-qualified annuity is funded wit🎐h post-tax dollars.

Contributions to qualified 澳洲幸运5开奖号码历史查询:annuities are deducted from an investor's🔯 gross income and, along with earnings in the plan, grow tax-free. Neither contributions nor earnings are subject to federal taxes until retirement, when you make a withdrawal.

Understanding Qualified Annuities

A deposit into a qualified annuity is made without taxes being withheld. That effectively reduces the investor's income, and taxes owed, for that year. No taxes will be owed on the mon🍸ey that accrues in the qualified account year after year as long as no withdrawals are made.

Taxes on both the investor's contribution and the investment gains that have accrued will be owed after the investor retires and begins taking an annuity or any withdrawal from the account.

While distributions (withdrawals) from a qualified annuity are taxed as ordinary income, distributions from a non-qualified annuity are not subject to any income tax on the contributions, because the plan was funded with after-tax dollars. With a non-qualified annuity, taxes may be owed on the investment gains.

Each comes with its own pros and cons. The non-qualified plan offers the prospect of tax-free income during retirement. However, the qualified plan offers immediate 澳洲幸运5开奖号码历史查询:tax savings and a smaller hit on take-home pay during 🎀the person's working years.

Types of Qualified Annuities

Qualified annuities are often set up by employers as part of a company-sponsored retirement plan. Variations include the defined benefit (pension) plan, the 401(k), the 403(b), and the 澳洲幸运5开奖号码历史查询:individual retirement account (IRA).

• The defined benefit plan is a savings vehicle that commits the company to a specific payment, whether in a lump sum or in monthly installments, based on the employee's earnings history.
• A 401(k) is set up by a for-profit company to reward its employees. The 澳洲幸运5开奖号码历史查询:SECURE Act of 2019 now allows annuities to be included in 401(k) plans.
• The 403(b) is available primarily to teachers and some other public employees as well as workers at tax-exempt organizations.
• The IRA is the familiar savings plan that allows a pre-tax or Roth contribution up to a yearly limit.

An annuity can be qualified if it meets certain IRS criteria and follows its regulatory guidelines. Generally, an annuity that is not used to fund a 澳洲幸运5开奖号码历史查询:tax-advantaged retirement plan is a non-qualified annuity.

Other IRS Rules on Annuities

Non-qualified annuities purchased after Aug. 13, 1982, are taxed under a "last-in-first-out" protocol. This means that the first withdrawals made by the investor will be taken from accrued interest, which will be taxed as ordinary income. Once that interest has been fully taxed, the remaining principal or premium will be free of taxes. All of the rules governing qualified annuities are covered in IRS 澳洲幸运5开奖号码历史查询:Publication 575: Pension and Annuity Income.

The Bottom Line

A qualified annuity, as defined by the IRS, is funded with pre-tax dollars, which gives an immediate tax benefit to the investor. Contributions to a non-qualified plan, on the other hand, are made with after-tax dollars. This means that taxes are postꦬponed until withdrawals arꩵe made during retirement.