what is a qualified annuity 
a qualified annuity is a retirement savings plan that is funded with pre tax dollars a non qualified annuity is funded with post tax dollars to be clear the terminology comes from the internal revenue service irs contributions to qualified annuities are deducted from an investor s gross earnings and along with investments grow tax free neither is subject to federal taxes until after retirement when distributions are made contributions to a non qualified plan are made with after tax dollars understanding the qualified annuitya deposit into a qualified annuity is made without taxes being withheld that effectively reduces the taxpayer s income and taxes owed for that year no taxes will be owed on the money that accrues in the qualified account year after year as long as no withdrawals are made taxes on both the investor s contribution and the investment gains that have accrued will be owed after the investor retires and begins taking an annuity or any withdrawal from the account while distributions from a qualified annuity are taxed as ordinary income distributions from a non qualified annuity are not subject to any income tax on the contributions taxes may be owed on the investment gains which generally are a smaller portion of the account it is a matter of debate which is better the non qualified plan offers the prospect of tax free income after retirement however the qualified plan offers immediate tax savings and a smaller hit on take home pay during the person s working years no taxes are owed on money that accrues in a qualified account as long as no withdrawals are made types of qualified annuitiesqualified annuities are often set up by employers as part of a company sponsored retirement plan variations include the defined benefit plan the 401 k and 403 b retirement plan and the individual retirement account ira an annuity can be qualified if it meets certain irs criteria and follows its regulatory guidelines generally an annuity that is not used to fund a tax advantaged retirement plan is a non qualified annuity non qualified annuities purchased after aug 13 1982 are taxed under a last in first out protocol this means that the first withdrawals made by the investor will be taken from accrued interest which will be taxed as ordinary income 34 once that interest has been fully taxed the remaining principal or premium will be free of taxes all of the rules governing qualified annuities are covered in irs publication 575 pension and annuity income 