Qualified Annuity

A qualified annuity is an annuity which is funded with pre-tax income.

Qualified annuity. Be aware that some state laws however may have this type of requirement. Variable annuities can be qualified as part of a retirement plan or IRA. A qualified annuity refers to a retirement savings plan that is funded with pre-tax dollars with tax-deferred features and is approved by the Internal Revenue Service IRS.

On the other hand non-qualified annuity refers to annuities funded with money that has been taxed hence only a small portion of the withdrawal amount is taxed. A non-qualified annuity is purchased with after-tax dollars that were not from a tax-favored retirement plan. As with many annuity investments a qualified annuity is a financial tool used to help accumulate funds for retirement.

Qualified annuities are usually set up through an employer as part of a pension plan which is designed to provide income for employees after retirement. But when you take distributions from a qualified annuity the entire distribution amount contributions and earnings will be subject to ordinary income taxes. Qualified annuities have attractive tax advantages because they help reduce taxable income and accumulate tax-deferred earnings.

An annuity not connected to a formal retirement plan does not have tax advantages. As a deferred annuity. All funds deposited into a qualified annuity must be earned income.

A qualified annuity differs from a non-qualified annuity in that it is funded by pre-tax dollars. Qualified is just an IRS term for funding with pre-tax dollars. Premiums for qualified annuities are paid with pre-tax dollars whereas all other types of annuity premiums are paid with after-tax dollars.

What are Qualified Annuities. Qualified annuity contributions depend on your income and eligibility for other qualified retirement plans. An annuity is a type of contract between an individual and an insurance company.