Qualified and Non-Qualified Annuities

Premiums/Overview
Premiums paid into non-qualified annuities are not tax deductible. On the other hand, premiums paid into qualified annuities can be tax-deductible based on current tax law.

Accumulation/Overview
Earnings for both non-qualified and qualified annuities can accumulate tax-deferred.

Tax Penalty/Overview
Pre-tax dollars withdrawn before age 59.5 could trigger a 10% excise federal tax penalty for both the non-qualified and qualified annuity.

Distribution/Overview
Distributions do not have to begin at age 70.5 from the non-qualified annuity but distributions should begin at age 70.5 for the qualified annuity (subject to a 50% penalty).

Death Benefit/Overview
For non-qualified annuities, current tax code allows the spouse, if the named beneficiary, to continue the annuity without a "forced distribution" if the owner dies. On the other hand, a non-spousal beneficiary must receive the proceeds within 5 years of owner’s death. However, both parties, spouse and non-spouse, must pay income taxes on the tax-deferred earnings when received. A beneficiary can lessen taxes plus continue tax-deferred growth via stretching the payments.

Partial Withdrawals / Non-Qualified
While most annuities allow free annual withdrawals, this does NOT mean that the withdrawals are also income tax free. With non-qualified annuities, earnings withdrawn are a) subject to income taxes and b) a possible 10% tax penalty if earnings are withdrawn prior to age 59.5. As stated earlier, there are ways to avoid that tax penalty 1) death or disability of owner, 2) substantially equal payments, and 3) payments from an immediate annuity.