Non Qualified Annuity
Over 100 Carriers to Quote From. Here are a few of them!
Non Qualified Annuity: How It Works
A non qualified annuity is funded with after-tax money, grows tax-deferred, and offers flexible ways to create retirement income—without required minimum distributions (RMDs). This guide explains taxes, withdrawals, income options, and when a non-qualified contract may fit.
What Is a Non Qualified Annuity?
How NQ annuity contracts are funded and regulated
It is an insurance contract purchased with after-tax dollars. Unlike IRAs or 401(k)s, contributions are not tax-deductible. In exchange, the annuity’s growth is tax-deferred until you take money out. They come in several designs—multi-year guaranteed (MYGA), fixed indexed, immediate income, and deferred income—so you can match guarantees and income timing to your plan.
For a plain-English foundation on product types, see our annuity basics and options. If you want current yields, review today’s current fixed annuity rates.
NQ Annuity Taxation & Withdrawals
Tax-deferred growth, LIFO rules, and the exclusion ratio
Growth is tax-deferred. You don’t report annual interest or index credits while funds remain inside the contract.
Withdrawals use LIFO. Partial withdrawals are generally taxed on a last-in, first-out basis—gains come out first and are taxed as ordinary income. If you’re under age 59½, the taxable portion may also face a 10% federal penalty.
Exclusion ratio for payouts. If you convert the contract to a stream of payments (annuitization or certain income riders), each payment is split between tax-free return of premium and taxable earnings using the annuity exclusion ratio guide.
No RMDs. Unlike qualified accounts, a NQ annuity has no required minimum distributions. You control timing—use systematic withdrawals, delay for compounding, or turn on lifetime income when needed.
Creating Income from a NQ Annuity
Systematic withdrawals, annuitization, and lifetime income riders
- Systematic withdrawals: Take monthly or annual payments you can start and stop. Taxes apply to the gain portion until basis is recovered.
- Annuitization: Irrevocably convert the value to guaranteed payments for life or a set period using the exclusion ratio.
- Lifetime income riders: Add a rider (fee-based or built-in) that guarantees lifetime income while keeping account value access for liquidity or beneficiaries, subject to rider terms.
Not sure which path fits? Our team can model after-tax cash flow using current fixed annuity rates alongside Social Security and other income sources.
Beneficiaries, 1035 Exchanges & Portability
Passing values efficiently and upgrading contracts over time
- Beneficiaries: When the owner dies, untaxed gains are typically taxable to beneficiaries as ordinary income—annuities generally do not receive a step-up in basis.
- 1035 exchange: You may move a NQ annuity into a new contract via a tax-free 1035 exchange to improve rates or features, subject to surrender periods and suitability.
- Ownership design: Titling and beneficiary language matter; coordinate with your estate plan to align goals and timelines.
Non Qualified vs Qualified Annuities
Key differences in taxes, contributions, and withdrawals
| Feature | Non Qualified Annuity | Qualified Annuity |
|---|---|---|
| Funding | After-tax contributions | Pre-tax or rollover IRA/plan dollars |
| Tax on growth | Tax-deferred until withdrawn | Tax-deferred until withdrawn |
| Withdrawal taxation | LIFO on partial withdrawals; exclusion ratio on payouts | Generally fully taxable as ordinary income |
| RMDs | No RMDs | RMDs apply to IRA/plan balances |
| Contribution limits | No formal IRS cap, subject to carrier limits | Plan/IRA limits apply before rolling in |
When a NQ Annuity Makes Sense
Practical use-cases for tax-deferred growth and income
- After maxing tax-favored accounts: You’ve funded workplace plans and IRAs and still need tax-deferred accumulation.
- Principal protection goals: MYGAs and fixed indexed annuities can protect principal while offering competitive yields or index-linked credits.
- Income timing control: You want flexibility to start income later and coordinate with Social Security.
- Legacy with control: You prefer a beneficiary-friendly contract with optional riders for enhanced death benefits or long-term care features (availability varies by state and carrier).
See our page on retirement lifetime income services if you’re evaluating guaranteed income alongside pensions or rental cash flow.
Advantages and Trade-Offs
Balancing safety, taxes, liquidity, and growth potential
| Advantages | Trade-Offs |
|---|---|
| Tax-deferred growth outside retirement plans | Ordinary income taxes on gains (not capital-gains rates) |
| Optional lifetime income and principal protection designs | Surrender charges and rider fees may apply |
| No required minimum distributions | 10% penalty on taxable amounts if withdrawn before 59½ |
| Beneficiary designations bypass probate | No step-up in basis on remaining gains at death |
| 1035 exchanges allow future improvements | Suitability and carrier approval required for changes |
FAQs: Non Qualified Annuity
What is a non qualified annuity?
It’s an after-tax annuity contract that grows tax-deferred and has no RMDs. Taxes are due when you take withdrawals or receive income payments.
How are withdrawals taxed from a non qualified annuity?
Partial withdrawals are usually taxed on a last-in, first-out basis—gains come out first and are taxed as ordinary income. Before age 59½, the taxable portion may incur a 10% penalty.
How does the exclusion ratio work on income payments?
Each payment is split between tax-free return of premium and taxable earnings according to the contract’s exclusion ratio. See our annuity exclusion ratio guide for examples.
Can I 1035 exchange a non qualified annuity?
Yes. A 1035 exchange can move your value into a new contract without current taxation, subject to rules, surrender periods, and suitability review.
Do beneficiaries pay tax on a non qualified annuity?
Typically yes—any untaxed gains are taxable as ordinary income to beneficiaries. Annuities generally do not receive a basis step-up.
Helpful resources
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