Taxation of a Non-Qualified Annuity

Taxation of a non-qualified annuity

  • Funding: Qualified annuities are often funded with pre-tax dollars,  so all of the funds removed from the annuity will be taxable as ordinary income. Roth IRA annuities are not taxable because they are funded with after-tax money.
  • Distributions: Qualified annuities are mandatory for a Required Minimum Distribution (RMD). Failure to take a required minimum distribution will result in a 50% IRS penalty.  Distributions from a qualified annuity are required by April 1st of the year after you reach 72 in most cases. Of course, the IRS has some exceptions.
  • Payouts: You will pay normal income taxes on the entire distribution amount. Annuities purchased with a Roth IRA or Roth 401(k), however, may be tax-free if specific requirements are met.
  • Other  If you invest in an annuity to fund a retirement plan or an IRA, the annuity will not provide additional tax deferral benefits for that retirement plan or IRA plan.

Taxation of non-qualified annuities

  • Funding: Non-qualified annuities are invested with post-tax money and grow tax-deferred.
  • Distributions: Non-qualified annuities are exempt from Required Minimum Distribution guidelines. Once you start taking distributions from a non-qualified annuity, any interest or earnings within the annuity will be distributed before the premium or principal amount.
  • Payouts: The interest (or earnings) are taxed as ordinary income but you won’t pay taxes on the premium or funds you initially deposited.