There are no differences in the function of qualified and non-qualified annuities. Both are designed to safely store money you earmark for retirement. Calling an annuity "qualified" or "non-qualified" does not refer to a product feature but instead indicates the account owner's eligibility to deduct contributions from future income tax returns.
Qualified Retirement Plans
Retirement investment vehicles are "qualified" when they have met specific IRS criteria and follow regulatory guidelines. Deposits into qualified plans result in an income tax deduction, but limits exist regarding maximum contributions. Money accumulates without tax liability until it is withdrawn, and money taken prior to age 59 1/2 typically results in a 10 percent penalty.
Non-Qualified Retirement Plans
A non-qualified retirement plan is one that does not meet IRS criteria for deducting contributions on your income taxes. Deposits into non-qualified retirement vehicles still accumulate without tax liability, but only the portion of each withdrawal that's considered earnings is fully taxable. Non-qualified investments have the same age restrictions as their qualified counterparts, and taxable distributions before age 59 1/2 usually result in a 10 percent penalty. There are no limitations or restrictions on how much money you can contribute to non-qualified accounts.
As an individual, you may purchase either a qualified or non-qualified annuity. If you designate the annuity as an IRA, you will receive an income tax deduction for your contributions, provided your income and deposits meet IRS guidelines. If you have already deposited the annual maximum dollar amount into your IRA, but you want to save more money in a tax-advantaged account, you can purchase a non-qualified annuity. Contributions cannot be deducted on your taxes, but earnings in the account will remain tax-deferred until you withdraw them.
A significant number of employer-sponsored retirement plans contain annuity products. Contributions to group annuities get deducted from your earnings, and the income taxes ordinarily due on your deposit are deferred to a future date. Annuities held within corporate retirement plans are almost always qualified.
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