Nonqualified Annuity

Is not subject to annual IRS contribution limits — Nonqualified annuities are funded with after-tax dollars and are not subject to the annual contribution limits that apply to IRAs and qualified plans. An owner may put any amount into a nonqualified deferred annuity. The tax advantage comes from tax-deferred accumulation of the earnings, not from a deduction for the premiums. IRAs, by contrast, have annual contribution caps set by federal law.

National insurance concept

Qualified annuity premiums are generally made with pre-tax dollars and all distributions are taxable, while nonqualified premiums are after-tax and distributions are partly tax-free via an exclusion ratio — A qualified annuity funds a tax-qualified retirement plan such as an IRA or 401(k): contributions are deductible, growth is deferred, and every dollar distributed is taxable because no basis exists. A nonqualified annuity is funded with after-tax money, so each payment is partly a return of basis and partly gain — taxed under the exclusion ratio of IRC Section 72(b). This funding-and-taxation distinction is the central difference.

National insurance concept