What Is the Difference Between Qualified & Non-Qualified Annuities?

by Jay P. Whickson ; Updated July 27, 2017
Some qualified annuities are tax-deductible.

Annuities are investment vehicles backed by various types of investments. They have many different labels for the same product. For instance, an annuity can be an immediate annuity, a fixed annuity, and a non-qualified or qualified annuity.

Types

Although there are several different labels, most annuities fall under three categories: fixed, variable or indexed. The terms describe the type of funding used inside the annuity.

Qualified

If you have money in a pension, IRA, 401(k) or 403(b), the money is qualified money. It simply means it's for retirement and you have special rules about removing it.

Non-qualified

Money without the pension or IRA designation is non-qualified money. You don't have to wait to remove it until retirement in most cases, except for a non-qualified annuity.

Rules

If you have a qualified annuity in any plan but the Roth IRA, you must start to take money at least by 701/2. If you don't, there's a penalty. This isn't true of a non-qualified annuity or a qualified annuity in a Roth IRA.

Limits

Non-qualified annuities are not subject to limitations on the amount you can invest each year. Qualified annuities have limits based on the type of plan they fund.

Income

If you invest in a qualified annuity, there are restrictions based on your income. For IRAs, if you earn over a maximum amount and have another pension you’re ineligible to contribute. Most pensions are percentages of income. You can earn any amount and have a non-qualified annuity.

Photo Credits

  • Image by Flickr.com, courtesy of Juhan Sonin