Get Free Comparison Quotes for Non-Qualified Annuities
A non-qualified annuity is funded with after-tax dollars, allowing you to grow your wealth tax-deferred without the strict contribution limits or Required Minimum Distributions (RMDs) associated with traditional retirement accounts. Because guaranteed growth rates, lifetime income options, and surrender fee schedules vary significantly across insurance companies, comparing your choices side by side is essential to maximizing your after-tax retirement income. Fill out the short form below to request your free, customized comparison quotes, or call us directly at 770-755-1565 to speak with an independent licensed broker right now.
What a Non-Qualified Annuity Is
A non-qualified annuity is funded with after-tax money (cash or brokerage dollars). Growth is tax-deferred, but not tax-free. You only pay taxes on the gains when you take money out. Unlike qualified accounts, there are no IRS-mandated required minimum distributions (RMDs) during your lifetime.
Types You Can Buy With Non-Qualified Money
- Fixed (MYGA): Multi-year guaranteed annuities with a set rate for a term.
- Fixed Indexed Annuity (FIA): Credits interest based on a fixed rate or index strategies like the S&P 500, Dow Jones, or Nasdaq. Interest is locked in and can’t be lost. Optional income riders (GLWBs) are available.
- Single Premium Immediate Annuity (SPIA): Pays income within 12 months. A life-only SPIA can avoid the 10% IRS penalty before age 59½.
- Deferred Income Annuity (DIA): Buy now, start income later with larger payouts.
- Variable Annuity (VA): Invested in subaccounts with higher risk and fees. Often less attractive than MYGAs or FIAs.
How You Can Fund a Non-Qualified Annuity
- Cash from savings, CDs, or brokerage accounts
- Proceeds from asset sales
- 1035 exchange from another Nonqualified annuity or cash-value life insurance
You cannot fund a non-qualified annuity directly with IRA, 401(k), or other qualified dollars.
Compare Nonqualified Annuity Rates
Note: This tool illustrates two types of annuity payouts: Advanced and Level payouts. An advanced income annuity provides much higher income early on, then decreases after 10+ years. A level income annuity, by contrast, pays the same amount every year for life.
Liquidity Rules
- Annual withdrawals: Typically up to 10% penalty-free each year
- Health waivers: Many contracts allow extra access if you face terminal illness, nursing home care, or home health needs
- Comparison to CDs: Annuities usually offer better liquidity than CDs because of these waivers
How Taxes Work
- Withdrawals (before annuitization): Taxed on a last-in, first-out (LIFO) basis—gains come out first.
- Annuitized payments: Use the exclusion ratio, making part of each payment tax-free until your principal is recovered.
- GLWB payments: Usually taxed like withdrawals (LIFO) until gains are exhausted.
- At death: No step-up in basis. Beneficiaries pay ordinary income tax on any returns earned.
Expert Note: If you are leaving this asset to a beneficiary, they may not have to cash it out all at once. Read our guide on the non-qualified stretch annuity to see how they can take smaller distributions over their lifetime to minimize the tax hit.
Non-Qualified Annuity Pros and Cons
Pros:
- Tax-Deferred Growth: Investments grow without immediate tax implications, potentially leading to more substantial gains.
- No Contribution Limits: Unlimited annual investment, providing more flexibility than other retirement accounts like IRAs or 401(k)s.
- No RMDs (Required Minimum Distributions): Greater control over retirement funds with no mandatory withdrawal age.
- Estate Planning Flexibility: Non-qualified annuities can be an efficient way to transfer wealth to heirs.
Cons:
- Taxation on Withdrawals: Withdrawn earnings are subject to ordinary income tax rates, potentially higher than capital gains rates.
- Penalties on Early Withdrawals: Accessing funds before age 59½ may lead to a 10% penalty on the earnings.
- Fees and Charges: These annuities may come with considerable fees, including commissions, surrender charges, and annual management fees.
- Complexity and Variability: The array of options and contract riders can be overwhelming, and investment performance may fluctuate.
Non-Qualified Annuity Early Withdrawal Penalty
Non-qualified annuities are a popular investment choice because they allow your money to grow tax-deferred. However, they come with certain rules and penalties for early withdrawals.
Early Withdrawal Penalty For Non-Qualified Annuities
- 10% IRS Penalty:
- If you withdraw funds from your non-qualified annuity before the age of 59 1/2, you will generally face a 10% early withdrawal penalty on the earnings portion of the withdrawal.
- This penalty is in addition to the ordinary income tax you owe on the earnings.
- Ordinary Income Tax:
- Regardless of age, any earnings you withdraw from a non-qualified annuity are subject to ordinary income tax. The principal or the amount you initially invested is not taxed again since it was funded with after-tax dollars.
Exceptions To The 10% Early Withdrawal Penalty
The IRS provides several exceptions to the 10% early withdrawal penalty for non-qualified annuities. You may avoid the penalty if the withdrawal is made under the following circumstances:
- Disability: If you become totally and permanently disabled, you may withdraw funds without incurring the 10% penalty.
- Substantially Equal Periodic Payments (SEPP): Withdrawals made as part of a series of substantially equal periodic payments based on your life expectancy can avoid the penalty. These payments must continue for at least five years or until you reach age 59 1/2, whichever is longer.
- Death: The beneficiary can withdraw the funds without the 10% penalty if the annuity owner dies.
- Qualified Domestic Relations Order (QDRO): Distributions made to an ex-spouse or dependent under a QDRO as part of a divorce or separation agreement can be exempt from the penalty.
- Medical Expenses: If you incur medical expenses that exceed 7.5% of your adjusted gross income (AGI), you may be able to withdraw funds without penalty.
- Annuity Payouts: Payments made as part of a lifetime annuity payout (annuitization) are not subject to the penalty, even if you are under 59 1/2.
Types Of Non-Qualified Annuities
- Non-Qualified Fixed Annuities: Earn a steady amount of interest over time with safe growth.
- Non-Qualified Variable Annuities: Investment value can fluctuate based on the performance of mutual funds.
- Non-Qualified Indexed Annuities: Returns tied to a market index, like the S&P 500, with some protection against losses.
- Non-Qualified Immediate Annuities: Start receiving income immediately after a lump sum investment.
- Non-Qualified Deferred Annuities: Money grows until you’re ready to start taking income in the future.
- Non-Qualified Longevity Annuities: Payments start later in life, helping to cover expenses in old age.
Qualified vs. Non-Qualified Annuities: Key Differences
| Feature | Qualified Annuity | Non-Qualified Annuity |
|---|---|---|
| Funding | Pre-tax dollars | After-tax dollars |
| Tax Deductibility | Contributions are tax-deductible | Contributions are not tax-deductible |
| Tax Treatment on Withdrawals | Fully taxable as income | Only earnings are taxed |
| Required Minimum Distributions (RMDs) | Required starting at age 73 or 75 | Not required |
| Contribution Limits | Subject to IRS limits | No limits |
| Early Withdrawal Penalty | 10% before age 59½ | 10% on earnings before age 59½ |
Which One Is Better?
- Use qualified if you’re still working and want a deduction
- Use a non-qualified to shelter after-tax money with tax deferral and optional lifetime income
Helpful Tip: This page defines the specific tax structure of non-qualified accounts. If you are debating which funding source to use and want a comprehensive side-by-side analysis, read our master guide comparing a qualified vs. non-qualified annuity to determine the best tax strategy for your retirement.
Are There Better Alternatives?
- Fixed Index Annuity with Guaranteed Lifetime Withdrawal Benefit (GLWB): Offers tax deferral, income guarantees, and higher withdrawal rates than traditional investments.
- Life Insurance: Provides tax-free death benefits and can build cash value for tax-advantaged withdrawals.
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Questions From Our Readers
Are RMDs required on non-qualified annuities?
No, RMDs are not required on non-qualified annuities. However, you may be subject to income tax on the amounts withdrawn.
Are there any penalties if I withdraw from the non-qualified annuity early?
Yes, early withdrawals before age 59½ typically incur a 10% IRS penalty on earnings, plus regular income tax on the gains.
What are the taxes owed on a non-qualified annuity to a beneficiary?
Taxes on nonqualified annuities inherited by a beneficiary depend on several factors, including the annuity’s value, the beneficiary’s tax bracket, and whether distributions are taken as a lump sum or over time. Generally, the beneficiary pays income tax on the earnings portion of distributions, while the original owner’s contributions are not taxed.
I will be withdrawing from my non-qualified fixed annuity for the first time at age 60. Will the taxes on the annuity be included in my federal income tax?
Yes, they will. Withdrawals from a non-qualified fixed annuity are subject to federal income tax. The earnings portion of your withdrawal is taxed as ordinary income. Since you are over 59½, you won’t face the 10% early withdrawal penalty typically applied to younger annuitants. The principal portion, which is the amount you initially invested, is not taxed, as you’ve already paid taxes on this money.
I’m 58 and cashed out a non-qualified annuity that’s out of surrender to move the money into another annuity within a week. Should you still worry about a 10% penalty?
A cash surrender before age 59½ generally triggers income tax and a 10% additional tax on taxable earnings unless an exception applies. Buying another annuity a week later does not by itself undo that taxable withdrawal.” Retain the separate explanation of a properly arranged direct 1035 exchange. To avoid these, it’s best to use a direct transfer between the insurance companies, known as a 1035 exchange. This method avoids taking direct possession of the funds, thus maintaining the tax-deferred status of the annuity and avoiding immediate taxation on any gains. Always consider completing a transfer form on the new annuity’s application to facilitate this direct transfer and avoid potential tax complications.
Can I cash out a non-qualified annuity?
Yes, you can cash out a non-qualified annuity, but be aware of potential surrender charges. These charges typically apply to the interest earned and vary depending on the policy terms.
Can you rollover a Non-Qualified Annuity?
A non-qualified annuity cannot be rolled into a tax-advantaged retirement account like an IRA. However, you can perform a 1035 exchange to switch to another non-qualified annuity without incurring immediate taxes.
How are Non-Qualified Annuities taxed at death?
Spouse Beneficiary: Can continue the annuity tax-deferred.
Non-Spouse Beneficiary: Can take lump sum or stretch withdrawals; earnings are taxed as income.
Annuitized Payments: Taxable based on the exclusion ratio, which determines how much of each payment is taxable.
How do I know if my IRA is qualified or non-qualified?
All IRAs are qualified accounts, whether traditional or Roth. The tax treatment differs, but they’re still under IRS-qualified rules.
What is the major advantage of a non-qualified plan?
They allow unlimited contributions and are customizable, especially for executives or high-income earners.
What is an example of a non-qualified plan?
Examples include deferred compensation plans, executive bonus plans, and supplemental executive retirement plans (SERPs).
How long do I have to withdraw an inherited non-qualified annuity?
For a non-spouse beneficiary when the owner dies before annuitization, the balance generally must be distributed within five years, unless qualifying life-expectancy payments begin within one year. A surviving spouse may be able to continue the contract.
Do you pay taxes on non-qualified accounts?
Yes. You pay taxes on interest, dividends, and capital gains as they’re earned or realized. There is no tax deferral unless inside an annuity or insurance product.
Does a non-qualified annuity get a step-up in basis?
No. Beneficiaries pay income tax on the gain portion. There is no step-up in cost basis like there is with stocks or real estate.
What happens when a non-qualified annuity matures?
You can annuitize for income, surrender it for a lump sum, or do a 1035 exchange. Taxes are owed on any gains.