how a qualifying annuity works
qualifying annuities are not tax deductible plans in and of themselves they must reside within a qualified plan or ira to enjoy this status qualifying annuities can be either the sole vehicle inside the plan or account or they can be one of several other choices that are offered as well in many cases the qualifying annuity is a variable contract and is the only vehicle offered within the plan with the variable subaccounts constituting the choices available to plan participants there are many types of annuities to choose from depending on a variety of factors from retirement income needs to comfortability with financial risk types of annuitiesthe products that go into qualified and non qualified annuities are the same however the rules for non qualified annuities are different which is covered in irs publication 575 one twist is that when a non qualified annuity is partially or fully surrendered the first dollars out are considered earnings for tax purposes and are thus taxed at ordinary income rates once all of the earnings have been withdrawn the remaining money the original investment can be taken out tax free if payments under a non qualified plan are taken in the form of periodic payments part of each payment is treated as a return of the original investment for which no taxes are due part of the payout is considered earnings and taxed at ordinary income rates the exact percentages of earnings versus principal are based on the type of payout and the beneficiary s age annuities can be structured generally as either fixed or variable fixed annuities provide regular periodic payments to the annuitant variable annuities allow the owner to receive more significant future cash flows if investments within the annuity fund do well and smaller payments if its investments do poorly this provides for less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund s investments special considerationsthere are many other considerations including sales fees commissions and the length of the annuity whether an annuity is qualified or not withdrawals before age 59 are subject to a 10 penalty since the non qualified annuity is purchased with after tax dollars only the earnings would be subject to the penalty 