A non-qualified annuity is purchased with after-tax dollars that were not from a tax-favored retirement plan. All annuities are allowed to grow tax-deferred. This means any earnings on the investment are not taxed until they are paid out to the annuity holder.

What is the basic income tax treatment of nonqualified annuities?

A non-qualified annuity is not part of an employer provided retirement program and may be purchased by any individual or entity. Contributions to non-qualified annuities are made with after-tax dollars and are not deductible from gross income for income tax purposes.

Do you get a step up in basis on a non-qualified annuity?

Unlike other investments, the named beneficiary of a nonqualified annuity does not get a step-up in tax basis to the date of death. However, that doesn’t mean the beneficiary will have to pay taxes on the full amount.

What’s the difference between a qualified and a non qualified annuity?

A non-qualified annuity is purchased with after-tax dollars that were not from a tax-favored retirement plan. Non-qualified annuity premiums are not deductible from gross income. All annuities are allowed to grow tax-deferred. This means any earnings on the investment are not taxed until they are paid out to the annuity holder.

How old do you have to be to take a non-qualified annuity?

Both qualified and non-qualified annuities require you to be 59 ½ before withdrawing funds. If you withdraw the money before that, the IRS imposes a 10-percent tax penalty on earnings.

How does Section 1035 exchange work for non qualified annuities?

In addition, the tax laws allow you to make transfers from one annuity to another without recognizing any tax. So-called Section 1035 exchanges cover the trading of life insurance policies and annuity contracts, and the tax-law provision allows such exchanges without having to recognize capital gain. Downsides of non-qualified annuity taxation.

How is money withdrawn from a qualified annuity taxed?

All money withdrawn from a qualified annuity is taxed as regular income. Conversely, only the earnings portion of withdrawals from non-qualified annuities is taxed.