Unlike the differences between deferred and immediate
annuities, or those between fixed and variable annuities, the
only real difference between a qualified and a nonqualified annuity
is the circumstance under which you buy them.
Qualified
annuities are those that are offered by your employer
as part of a pension or salary reduction plan. They
might be on the menu of options offered with a
401(k),
for example. The contributions that you make to qualified
annuities must come out of your earned income and
will reduce the amount of your taxable salary.
The size of the contribution you can make to a
qualified annuity is limited, however, and in most cases you’ll
have to begin receiving a
minimum
required distribution
from the annuity by age 70
1/2. (That’s the same thing as a required withdrawal.)
Nonqualified annuities are those that you purchase
on your own, outside of your employer’s retirement plan.
There is no cap on the annual amount you can put into a nonqualified
annuity. Some contracts may have a total limit, usually in the
$1 million range.
You can use money from any source to buy a nonqualified
annuity — not just earned income, but also
after-tax dollars. There’s no federal law dictating
when you must begin receiving income from the annuity,
nor are there required withdrawals. Some states and
some annuity providers may require you to begin taking
income, usually by the time you turn 85 or 90 years
old.
