Qualified Vs. Non-Qualified Annuities - Taxes & Distribution

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Qualified vs. Non-Qualified Annuities

Qualified and non-qualified are terms that characterize how the IRS treats annuities and other retirement-focused financial products at tax time. Both qualified and non-qualified annuities offer powerful savings advantages, but qualified annuities are typically tax-deductible while non-qualified annuities are not.

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• Written by Dori Zinn
• Edited By Lamia Chowdhury

  Lamia Chowdhury

  Financial Editor

  Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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• Reviewed By Ebony J. Howard, CPA

  Ebony J. Howard, CPA

  Credentialed Tax Expert at Intuit

  Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation.  She specializes in analyzing financial information in the health care, banking and real estate sectors.

  Read More
• Published: November 29, 2021
• Updated: May 21, 2025
• 5 min read time
• This page features 4 Cited Research Articles

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APA Zinn, D. (2025, May 21). Qualified vs. Non-Qualified Annuities. RetireGuide.com. Retrieved February 5, 2026, from https://www.retireguide.com/annuities/taxes/qualified-vs-non-qualified-annuity/

MLA Zinn, Dori. "Qualified vs. Non-Qualified Annuities." RetireGuide.com, 21 May 2025, https://www.retireguide.com/annuities/taxes/qualified-vs-non-qualified-annuity/.

Chicago Zinn, Dori. "Qualified vs. Non-Qualified Annuities." RetireGuide.com. Last modified May 21, 2025. https://www.retireguide.com/annuities/taxes/qualified-vs-non-qualified-annuity/.

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Key Principles

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One of the key features of annuities is their ability to grow tax-deferred, which means investment earnings are not taxed until they are paid out to the purchaser. However, there are IRS rules that govern if and when annuity taxes are due on the premium, which is the money you used to purchase the annuity.

These rules are characterized by the terms qualified and non-qualified. Qualified and non-qualified annuities differ in a number of ways — most importantly in how they are purchased and taxed.

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How Are Qualified and Non-Qualified Annuities Different?

A qualified annuity allows for a tax-deductible purchase (made with pre-tax dollars), while a non-qualified annuity involves a purchase made with money which has already been taxed. Moreover, when you receive a distribution from a qualified annuity, the entire amount — premium and earnings — is subject to ordinary income tax.

With a non-qualified annuity, only the earnings component is taxable since you already paid tax on the money used to make the purchase.

Another important distinction is the money used to buy the annuity. A qualified annuity can only be purchased with money from another type of qualified vehicle, such as a regular 401(k) plan or a traditional individual retirement account (IRA). An annuity purchased with a non-qualified source of money is automatically classified as non-qualified.

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The Basics of Qualified Annuities

A qualified annuity is a tax-advantaged financial product that can help you save for retirement. This is because the premium is allowed to grow tax-deferred, which can have a powerful cumulative effect over time.

You won’t pay taxes on the premium or the accumulated earnings until your annuity begins paying out, which usually occurs in retirement. However, the money used to buy a qualified annuity must come from another source of IRS-qualified funds.

Types of IRS-Qualified Funds

• Regular 401(k) plans
• Regular 403(b) plans
• Traditional IRAs
• Simplified Employee Pension (SEP) plans
• Tax-exempt savings plans

In addition to the funding source restriction, the IRS limits how much you can contribute to a qualified annuity annually. The limit depends on your income and the extent to which you participate in other qualified savings plans.

If you make withdrawals before turning 59 and a half, you could face a 10 percent tax penalty. All distributions are subject to ordinary income tax, regardless of what age you take them.

In some instances, the money in a qualified annuity can be transferred into a similar qualified annuity without triggering a tax liability. This transaction is known as an IRS 1035 exchange.

Benefits of a 1035 Exchange

• Earn a higher rate of return
• Reduce fees
• Take advantage of enhanced features offered by another annuity
• Move the money to a more financially sound insurance company

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The Basics of Non-Qualified Annuities

While a qualified annuity is purchased with pre-tax money and subject to contribution limits, a non-qualified annuity is purchased with after-tax dollars and has no contribution limits.

As a result, the purchase of a non-qualified annuity is not connected to IRS-qualified plans, such as 401(k) plans and traditional IRAs. The money used to purchase a non-qualified annuity can come from anywhere, like savings accounts, taxable brokerage accounts, and inheritances.

Since the money used to purchase a non-qualified annuity has already been taxed, it will never be taxed again. But you will get taxed when you begin taking distributions — unless the annuity was purchased within a Roth 401(k) plan or a Roth IRA. Earnings in Roth-style accounts are not taxable.

As with qualified annuities, non-qualified withdrawals before you turn 59 and a half years of age are subject to a 10 percent IRS penalty and a non-qualified annuity can be transferred via a 1035 exchange in certain circumstances.

Retirement Considerations

Annuities are often purchased and customized to meet retirement objectives. For many retirees, these products provide a great way to achieve a guaranteed stream of income in a low-risk, hands-off manner.

Both qualified and non-qualified annuities can help you save for retirement. But there are a number of differences between them, including tax deductibility, annual purchase limits, and distribution requirements.

Carefully consider all of these before you purchase an annuity. If you end up buying one, you’ll need to arrange how to eventually receive your distributions.

There are usually three distribution options:

• A lump-sum payment
• A stream of fixed payments for a set period of time
• A stream of fixed payments for life

Depending on your unique circumstances, any of one of these options could be optimal. Be aware that the lump-sum payment option could result in a sudden and significant tax liability, while the payment stream alternatives will spread your tax liability over time.

Regardless of your situation, remember that annuities are just one way to plan for retirement. Consider talking to a financial advisor about all of the ways you can save and invest and whether an annuity is sensible for your financial circumstances.

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Frequently Asked Questions About Qualified and Non-Qualified Annuities

Are annuities qualified or non-qualified? Annuities are financial contracts between an individual and an insurance company. Annuity contracts can be either qualified or non-qualified. Qualified annuities are purchased with pre-tax dollars, while non-qualified annuities are purchased with money that's already been taxed. Is there an RMD for non-qualified annuities? There is not a required minimum distribution (RMD) for non-qualified annuities. This type of annuity is funded with after-tax money, so it does not carry a withdrawal requirement like a qualified annuity. Can you roll a non-qualified annuity into an IRA? You cannot roll over a non-qualified variable annuity into a traditional IRA because the annuity is funded with after-tax dollars. IRAs are funded with pre-taxed dollars. However, you can move a non-qualified annuity into another type of account, such as another annuity or a CD. Advertisement

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Last Modified: May 21, 2025 Share This Page

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https://www.retireguide.com/annuities/taxes/qualified-vs-non-qualified-annuity/ Copy Link Dori Zinn President of Blossomers Media, Inc. Dori Zinn is a veteran personal finance journalist with more than ten years of expertise, whose work has been showcased in prestigious publications such as the New York Times, Wall Street Journal and CNN. As the President of Blossomers Media, Inc., she has also earned accolades for her leadership, notably guiding the SPJ Florida Pro Chapter to win the “Chapter of the Year” award twice. Dori's dedication lies in empowering individuals to grasp and manage their finances with confidence.

• Published in top outlets, such as the New York Times, Wall Street Journal, CNN and more
• President of Blossomers Media, Inc.
• Bachelor’s degree in Multimedia Journalism from Florida Atlantic University in Boca Raton, Florida

Edited By Lamia Chowdhury Financial Editor Email Financially Reviewed By Ebony J. Howard, CPA Credentialed Tax Expert at Intuit

4 Cited Research Articles

View Sources

1. IRS.gov. (2025, February 18). Traditional IRAs. Retrieved https://www.irs.gov/retirement-plans/traditional-iras
2. IRS.gov. (2025, January 30). 401(k) Plans. Retrieved from https://www.irs.gov/retirement-plans/401k-plans
3. IRS.gov. (2024, August 20). Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/roth-iras
4. Investor.gov. (n.d.). Section 1035. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/section-1035

On This Page

• Qualified vs. Non-Qualified Annuities
• Qualified Annuities
• Non-Qualified Annuities
• Retirement Considerations
• FAQs

• Annuities
  • Taxes
    • Qualified vs. Non-Qualified Annuities

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