Glossary
Qualified annuity, defined
A retirement contract funded with pre-tax money from an IRA, a workplace plan or a rollover, so that every dollar withdrawn is taxed as income. The contract lives inside the tax-advantaged account, and the account's rules on contributions, distributions and penalties apply on top of the contract's own terms.
In practice
The contrast is a non-qualified contract bought with after-tax money, where only the gain is taxed on withdrawal. Because the account already defers tax, the annuity's own deferral adds nothing; the reason to buy one inside an IRA is the insurance features, such as a lifetime income guarantee or a death benefit, and those should justify their cost. Required minimum distributions apply once the owner reaches the age the tax code sets, and the contract must be able to pay them without surrender charges. Contribution limits are set by the account type, not the contract. Rolling a workplace plan into an annuity is a common sales moment; comparing the fees against leaving the money in the plan is the analysis that matters.
A worked example
Suppose a retiree moves $300,000 from a former employer's plan into a fixed contract by direct rollover. No tax is due on the transfer. Suppose she later withdraws $15,000; the full $15,000 is taxable income, because none of it was taxed going in. Under a non-qualified contract funded with $300,000 of savings, only the growth portion would be. Hypothetical figures.
Applies to: Annuities