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Qualified Annuities

Qualified Annuities refer to the tax status of the funds used to purchase the annuity. If the funds used to purchase the annuity premium were qualified for IRS tax-exemption status then the annuity is referred to as a qualified annuity. In these cases, payments received from the annuity to the annuitant are taxed upon receipt since the payments are considered a form of income.

Annuities are purchased by individuals as a form of purchasing future income. Annuities work as a form of loan reversal in that the purchaser or annuitant gives a large sum of money to a company for the purchase of an annuity. The annuity then pays the sum back to the purchaser with interest over a period of time. Sometimes this can provide an annuitant with secured lifetime income past retirement.

Examples of Payments for Qualified Annuities

All funds used to purchase qualified annuities originate in tax-exempt or tax-deferred origins. All origins of qualified funds are subject to the laws and penalties that Congress attaches to such plans. Some examples of origins of payments for qualified annuities are:

  • IRAs
  • Keogh plan
  • 401(k) plan
  • 403(b)
  • Defined Benefit or Defined Contribution Plan
  • Section 1035 or life insurance exchanges
  • SEP (simplified employee pension)
  • And any other tax-exempt savings plan

Earnings

Earnings on the qualified annuity plan are not taxed until withdraw, but there are penalties for withdrawing qualified annuity funds too early. If funds from a qualified annuity are withdrawn before the age of 59 ½ then there is a 10% penalty in addition to the regular income tax. Annuitants are exempt from this penalty under certain conditions which include annuity payments over a lifetime. All annuitants who have qualified annuities must begin taking minimum payments out at age 70 ½ .

Contrary to qualified annuities, non-qualified annuities are paid with funds that have already had taxes deducted.


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