What Is a Qualified Annuity?
A qualified annuity is a retirement savings plan funded with pre-tax dollars. These dollars are deducted from an investor’s gross earnings, meaning that both the contributions and the earnings on those contributions grow tax-free until retirement when distributions are made. This guide will help you understand the key aspects of qualified annuities, their types, and how they compare with other retirement plans.
Key Takeaways
- Contributions to a qualified annuity are made with pre-tax dollars, postponing taxes until withdrawals are made after retirement.
- Non-qualified annuities are funded with post-tax dollars, as taxes on the contributions have already been paid.
Related Terms: 401(k), IRA, Non-Qualified Annuity, Tax Advantaged Accounts
References
- Congress.gov. “H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019”.
- Internal Revenue Service. “Issue Snapshot - 403(b) Plans - Catch-Up Contributions”.
- Internal Revenue Service. “Publication 575 (2021), Pension and Annuity Income”.
- Annuity.org. “Qualified vs. Non-Qualified Annuities”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## A qualified annuity is funded with what type of funds?
- [x] Pre-tax dollars
- [ ] Post-tax dollars
- [ ] Cryptocurrency
- [ ] Foreign currency
## What is the primary benefit of contributing to a qualified annuity?
- [ ] Immediate liquidity
- [ ] Immediate tax deduction
- [x] Tax-deferred growth
- [ ] Comparable interest rates with savings accounts
## At what age can one typically begin withdrawing from a qualified annuity without penalty?
- [ ] 50
- [ ] 55
- [x] 59 1/2
- [ ] 65
## Contributions to a qualified annuity often have what effect on taxable income?
- [ ] No effect
- [x] Reduce taxable income
- [ ] Increase taxable income
- [ ] Subject to direct taxation
## In addition to traditional banks, from where else can qualified annuities be bought?
- [ ] Real estate agents
- [x] Insurance companies
- [ ] Stock brokers
- [ ] Pawn shops
## What happens to the growth of investments within a qualified annuity before withdrawal?
- [ ] Taxed annually
- [ ] No growth at all
- [ ] Penalized
- [x] Tax-deferred
## Which statutory requirement must qualified annuities meet according to the Internal Revenue Code?
- [x] Must comply with the Employee Retirement Income Security Act (ERISA)
- [ ] Must comply with individual state's worker protection laws
- [ ] Only from government-run facilities
- [ ] Limits foreign investment
## Which of these distributions from a qualified annuity will trigger taxes?
- [x] Early withdrawals
- [ ] Qualified charitable distributions
- [ ] Hardship withdrawals
- [ ] All distributions
## At what typical age must Required Minimum Distributions (RMDs) begin from a qualified annuity?
- [ ] 55
- [ ] 60
- [x] 72
- [ ] 80
## What primary consequence exists for not starting Required Minimum Distributions (RMDs) from a qualified annuity on time?
- [ ] Forfeiture of the annuity
- [ ] Additional contributions halted
- [ ] Decreased market value
- [x] Severe tax penalties
