What Is a Nonqualified Annuity?
An annuity is an investment contract that allows an individual to make regular contributions to a portfolio of stocks, bonds, mutual funds or other investment vehicles. There are various kinds of annuities, but for tax purposes, they fall into two basic groups: qualified and non-qualified.
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Qualified
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A qualified annuity allows the owner or employer to deduct contributions from income for tax purposes. These annuities are part of a retirement or pension plan provided by an employer, or an individual retirement plan.
Non-Qualified
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A non-qualified annuity is one that an individual buys and is not part of an employer-provided pension plan. Contributions to a non-qualified annuity are not tax deductible. There is no limit on the amount or the source of contributions.
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Feature
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The non-qualified annuity can avoid current tax on the investment gains if it is held in trust, or if it is acquired by an estate on the death of the owner. Non-qualified annuities held by charities--or those that originated before February 28, 1986--are not subject to capital gains taxes.
Benefit
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The law also does not require withdrawals from annuities--in contrast to IRAs--from which investors must set up regular withdrawals by the time they reach the age of 70.5.
Considerations
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Individuals can purchase non-qualified annuities to supplement their employer pension plans. Self-employed persons can also set up retirement investments with a non-qualified annuity.
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