An annuity is great at offering a long-term investment for retirement with tax-free options for distribution. Since the introduction of the the annuity, there have been many new options to the annuity taxation system. This makes it increasingly more difficult to understand for new customers. Just like the market, annuity tax options have grown into a complicated system incorporating many aspects of market regulation. This system classifies the annuity into two different tax categories: qualified and non-qualified.
Qualified Annuity
A qualified annuity is acquired by investors as a part of a retirement funds account. It is generally given to employees whom are part of a larger corporation. The contributions made by employees are tax-deductible and are added to an annuity in their full amount. Conversely, once they are withdrawn they will be taxed like any other part of the owner's income. This employer annuity plan, often referred to as an IRA, isn't any different in its taxation than any other tax-free retirement plan. Companies offer the qualified annuity as a complement to their normal retirement plans to further improve employee benefits.
Non-Qualified Annuity
A non-qualified annuity is purchased as a separate entity from a retirement plan. It can be purchased and funded by any individual whether he is connected to a corporation or not. Contributions to this annuity must be from the investor's taxed income. It does not incorporate the same tax-free contribution deductibles as the qualified annuity. This money is also taxable once it is distributed or withdrawn, however, only the additional earnings from interest are taxed. In other words, money is not taxed twice. However, if the annuity is taken out before the age of 59 ½, the entire lump sum of that money is subject to a 10 percent tax penalty.
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