Qualified Annuity: What Is It And How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

A qualified annuity is a financial product that can help you save for retirement while generating income. This type of annuity has been around for quite some time, but it’s not too late to learn more about the qualified annuitant and how it works! In this guide, we will discuss:

What Is A Qualified Annuity?

A qualified annuity is a savings plan for retirement. You put in money before taxes. A non-qualified annuity is a saving plan for retirement that you put in post-tax dollars. The difference comes from the IRS.

Contributions to a qualified annuity are taken from your earnings and set aside in the retirement plan to grow. They do not become taxed until you take them out of the account in retirement. Contributions to a non-qualified plan are made with dollars that have already been taxed.

Annuities That Accept Qualified Retirement Plans

Shop and compare annuities that accept funds from qualified retirement plans.

How A Qualified Annuity Works

The money that you deposit into qualified annuities is not taxed each year income is not withdrawn. This allows your taxes to be lower for the year. However, you will need to pay taxes on both the money you put in and the interest earned when you retire.

While distributions and interest 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, only the interest earned.

Qualified Annuity Types

When your company offers you a retirement plan, there are lots of choices. The most common is the 401(k), 403(b) retirement plan, and an individual retirement account (IRA).

  • The defined benefit plan is a savings plan that dictates how much money the employer will give to you. The payment amount depends on the employee’s earnings history.
  • A 401(k) is a type of retirement plan that a for-profit company offers to its employees. The SECURE Act now lets you include annuities in 401(k)s.
  • The 403(b) is available primarily to teachers, nurses and medical staff, public employees as well as workers at tax-exempt organizations.
  • The IRA is a popular savings plan that allows a pre-tax contribution up to an annual limit.

An annuity may be qualified if it meets certain requirements and follows IRS regulations.

Related Reading: Non-qualified vs qualified

How To Spend A Qualified Annuity Efficiently In Retirement

Employees can’t touch their qualified annuity plans without a tax penalty until they’ve reached the age of 59½ years. Annuities from previous employers can be rolled over or transferred to a better annuity that offers better features to maximize savings potential, principal protection, or guaranteed lifetime income. If a retiree is upon retirement, an annuity owner can transfer their current annuity into a new living benefit annuity. The annuity will then equally distribute a percentage of the annuity for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the account has run out of money.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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