A qualified annuity is purchased and funded by pretax dollars. In other words, this is money that comes to your straight from your employer without any taxes being withdrawn from it. IRA annuities, Roth IRA annuities, and 403(b) plan annuities fall into this broad category. You will ultimately be paying for this type of annuity eventually, but earning interest on money that would otherwise be lost to taxes will greatly increase your earning potential. Tax deferment is a great quality with annuities—this type of annuity plays tax deferment to the fullest degree.
Nonqualified annuities are bought with post-tax dollars. This type of annuity does not have the maximum benefits that qualified annuities do, but they are still superior to most other investments. For one, you don’t have to worry about where the money for these comes from. Premium payments can come from anywhere, not just earned dollars. This type of annuity will still be taxed, but at the exclusion rate. This formula determines how much of your distributions are taxable and how much are not. Annuities are taxed in a last in, first out basis, thus making your first few distributions the most heavily taxed. The more you withdraw, the less your taxation rate will be.
Qualified annuities seem to carry the most benefits, but there are exceptions to these. They are not always accessible to everyone. For example, 403(b) retirement plans are not available within the private sector, so while they might have more tax benefits, Nonqualified annuities also have an important place within your portfolio.