Nonqualified Annuities

A nonqualified annuity means that it was funded with after-tax funds. This does not make one better or worse than qualified annuities.  In fact, they can offer more options for your retirement plan.

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Annuity basics

An annuity is an insurance product that allows you to build or convert some of your retirement savings into a stream of guaranteed1 income payments that last for life, much like a pension. With an annuity as part of your retirement strategy, you will never be at risk of outliving your savings.

Related: Guide to annuities


Qualified vs. nonqualified annuities

With all the various options and opinions on annuities, it’s easy to get confused. There’s fixed vs. variable annuities. Immediate and deferred payments. And dozens of other benefits you can add on. When it comes to qualified vs. nonqualified annuities, however, the difference is simple. It’s just a label, defined by the IRS, for where the funds you contribute come from. 


Qualified = pretax contributions

Like your 401(k) or traditional IRA, all the funds in a tax-qualified annuity are tax-deferred. This gives them the ability to grow faster, which can add up to significant amounts over time. However, qualified accounts have contribution limits and come with additional restrictions governed by the Internal Revenue Code. When you withdraw money from a qualified annuity, it is taxed at the ordinary income rate. 


Nonqualified = after tax contributions

You can fund a nonqualified annuity any way you want, without the same IRS restrictions. Since you’ve already paid taxes before contributing the money into a nonqualified account, when you start to withdraw funds, the part on which you’ve already paid taxes will not be taxed again. Only growth in the annuity will be taxed.  


Growth is always tax-deferred

Any earnings from growth, either from a fixed interest rate or from investments in markets, are not taxed until they are paid out. It’s only the principal contributions that are taxed differently between the two options. That makes either a qualified or nonqualified annuity a good way to accumulate savings.

Related: Shop for annuities


Which is right for me?

That is a question you will need to discuss with your financial professional. Both have benefits and can provide income for life. A qualified annuity can give you an immediate tax break but is taxed as income when you withdraw it in retirement. Nonqualified funds are taxed before they go in, but you will not be taxed on your principal investment later. 

Your decision often comes down to this: In order to purchase a qualified annuity, you need to fund it with specific types of pretax income. If you can do that, you can choose either type of annuity, depending on what is right for your situation. If you’ve already contributed your maximum pretax contributions on other retirement accounts like a 401(k), then you will only be allowed to purchase a nonqualified annuity. 

Don’t let the complexities of annuities stop you from exploring them as an option to bolster your retirement savings. They are a great way to build or convert savings into payments that will continue for life. Our agents can walk you through how they work, step by step, and help you decide if one—and what type—is right for you.

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Want to learn more about life insurance?

A New York Life financial professional can help determine what’s right for you.

1The guarantees of life insurance are based solely on the claims-paying ability of the issuer. Guarantees remain in place as long as all premiums are paid.  

Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity. The prospectus contains this and other information and can be obtained from a financial professional.  Read the prospectuses carefully before you invest or send money.

Annuity products are issued by New York Life Insurance and Annuity Corporation and its parent company, New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010.  All guarantees are dependent on the claims-paying ability of the issuer. Available in jurisdictions where approved.

Variable annuities are offered by NYLIFE Securities LLC, Member FINRA/SIPC, a licensed insurance agency and New York Life company.

Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professionals before making any decisions.