Qualified vs. Non-qualified Annuities

Planning for retirement can feel overwhelming, especially when you start comparing different types of annuities. One decision you will make is qualified vs. non-qualified annuities.

Both qualified and non-qualified annuities have qualities that many find attractive. But what’s the difference between the two?

The biggest distinction is how they’re taxed. While both types of annuities can help you create reliable income later in life, they work differently when it comes to when you pay taxes, how much you owe, and whether you’ll be required to take money out at a certain age.

Understanding a few annuity basics can make it easier to choose the option that best supports your long‑term goals.

What Is a Qualified Annuity?

A qualified annuity is generally funded with money that hasn’t been taxed yet. Think of it as an extension of a tax‑advantaged retirement plan.

These annuities could be attractive to you because the money goes in untaxed, reducing your current taxable income and letting your savings compound faster than they would in a taxable account. Later, though, when you withdraw funds, every dollar is taxed as income.

A common example is rolling over your workplace retirement plan into an annuity. If you take money from your 401(k) or traditional IRA and place it into an annuity, that annuity becomes qualified because the original money was pretax.

Qualified annuities must also follow rules that require you to start withdrawing money after age 73. These are called Required Minimum Distributions (RMDs), and they’re designed to ensure the government eventually taxes the money you saved.

What Is a Non-qualified Annuity?

A non-qualified annuity is purchased with money you’ve already paid taxes on. That means when you take money out, you don’t pay taxes on your original investment — only on the earnings.

As a hypothetical example, if you put in $50,000, and that money grows to $70,000, you only pay taxes on the $20,000 in growth.

This type of annuity might be appealing because it offers flexibility. There are no required withdrawals, so you can access the money on your own schedule. Plus, a non-qualified annuity could be a good choice if you want to save more than you could in your workplace plan, because those plans have annual contribution limits.

Qualified vs. Non-qualified Annuities

Here’s a side‑by‑side look at qualified and non-qualified annuities.

Qualified Annuity

• Generally funded with pre-tax money
• Commonly used when you roll over a workplace plan like a 401(k)
• Taxes paid on every dollar taken out later
• Required withdrawals begin at age 73

Non-qualified Annuity

• Funded with after‑tax money
• Taxes paid on the growth, not on the total amount taken out
• No required withdrawals

Both

• If you take money out before age 59½, the IRS may charge an extra 10% penalty in addition to regular taxes. This applies to both types of annuities, although the amount taxed will differ depending on whether the annuity is qualified or non-qualified.

Which Is Best for You?

So, which annuity makes the most sense for you? It depends on your financial situation and what you want your retirement money to do for you. Understanding your goals can make choosing a qualified vs. non-qualified annuity easier.

Here are three scenarios:

• If you already contribute to a 401(k) or IRA and want additional retirement savings, a non-qualified annuity can give you more room to save.
• If you’re self‑employed or want to save more before taxes, a qualified annuity can help you lower your taxable income today.
• If you want control over when you take money out, a non-qualified annuity offers flexibility with timing.

You can explore WoodmenLife.org/Retirement to learn more about the products we offer. When you’re ready to decide on which annuity works best for you, a WoodmenLife Representative is ready to help explore your options.

Written by: Gary Peterson, Senior Copywriter

This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

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