Non-Qualified Annuities

Qualified vs. Non-Qualified Annuities at a Glance

Feature	Qualified Annuities	Non-Qualified Annuities
Source of Funds	Pre-tax dollars (IRA, 401(k), employer plans)	After-tax dollars (personal savings)
Contribution Limits	IRS limits apply	No IRS limits
Tax Deferral	Yes (on all contributions and earnings)	Yes (on earnings only)
Tax on Withdrawals	All withdrawals taxed as ordinary income	Only earnings taxed as ordinary income; principal is not taxed again
Required Minimum Distributions (RMDs)	Yes, starting at age 73	No RMDs
Early Withdrawal Penalty (before 59½)	10% IRS penalty plus taxes	10% IRS penalty on earnings only
Fixed Index Annuity Option	✅ Available for growth and guaranteed income	✅ Available for growth and guaranteed income
Use for Legacy/Estate Planning	May have restrictions; subject to retirement account rules	✅ Flexible beneficiary options

Non-qualified annuities provide unique flexibility and control over both contributions and withdrawals, while still offering the key benefits of tax deferral and principal protection through insured options like fixed index annuities.

Which Retirement Goals Can a Non-Qualified Annuity Help You Meet?

Retirement Goal	How a Non-Qualified Annuity Can Help
Save More Than IRS Limits Allow	Unlimited contributions—grow retirement savings beyond 401(k)/IRA caps
Tax-Deferred Growth	Postpone taxes on earnings until withdrawal, letting funds grow faster
Principal Protection	Fixed and fixed index annuities shield your savings from market losses
Reliable Lifetime Income	Turn savings into guaranteed income you can’t outlive with annuitization or income riders
Legacy & Estate Planning	Directly designate beneficiaries and pass remaining value to heirs outside probate
No RMD Pressure	Withdraw when you want—no mandatory distributions required
Custom Payout Options	Choose lump sum, fixed period, lifetime, or joint life payments for maximum flexibility

With these benefits, non-qualified fixed index annuities are often a strategic option for clients who have maxed out other retirement accounts or want more control over their retirement savings and legacy planning.

What is a Non-Qualified Annuity?

A non-qualified annuity is an insurance contract you fund with after-tax dollars. Unlike qualified annuities—which are set up through IRAs or 401(k)s using pre-tax money—non-qualified annuities use personal savings. While your contributions won’t reduce taxable income, all investment growth is tax-deferred until you withdraw funds.

Non-qualified annuities are a popular way to build savings after you’ve maxed out your 401(k) or IRA. They’re especially valuable for higher earners, business owners, and anyone seeking guaranteed income and principal protection outside of workplace plans.

How Non-Qualified Annuities Work

Accumulation Phase

During the accumulation phase, you contribute either a lump sum or periodic payments. Your funds grow tax-deferred, and can be allocated among several annuity types:

• Fixed Annuities: Guaranteed interest rates and principal protection
• Indexed Annuities: Returns linked to a market index (such as the S&P 500), with principal protection and upside growth potential
• Variable Annuities: (For comparison only) Investments in market-based subaccounts, subject to investment risk and higher fees

Distribution Phase

When you’re ready to draw income, non-qualified annuities offer several options:

• Guaranteed lifetime payments
• Fixed payments for a set number of years
• Lump sum withdrawals
• Joint income options for spouses

Your withdrawal choices will impact both the pace of your distributions and the tax treatment of your earnings.

Taxation of Non-Qualified Annuities

Taxes on Contributions and Earnings

Because you fund non-qualified annuities with after-tax dollars, your original contributions are not taxed again. However, any earnings (interest or index-linked growth) are taxed as ordinary income when withdrawn. The IRS uses an exclusion ratio to determine how much of each withdrawal is taxable income versus a return of principal.

Early Withdrawals

If you take money out before age 59½, you’ll pay a 10% IRS penalty on the taxable portion, plus regular income taxes—unless you qualify for an exception.

No Required Minimum Distributions (RMDs)

Unlike qualified accounts, there are no required minimum distributions (RMDs) for non-qualified annuities. You control when and how much you withdraw, giving you more flexibility to manage taxes and income.

Advantages of a Non-Qualified Annuity

1. No Contribution Limits

Non-qualified annuities let you save as much as you want—there are no IRS-imposed caps on contributions.

2. Tax-Deferred Growth

Your money grows without being taxed annually on interest, dividends, or gains, allowing wealth to compound over time.

3. Flexible Income Options

You can choose from lifetime income, fixed-term payments, or joint annuity income with a spouse—customizing how you access your savings.

4. Estate Planning Benefits

Many non-qualified annuities let you name specific beneficiaries, so your remaining account value can go directly to heirs—often bypassing probate.

Disadvantages of a Non-Qualified Annuity

1. Ordinary Income Tax on Earnings

When you withdraw investment growth, it’s taxed as ordinary income—not the lower capital gains rate.

2. Surrender Charges

Withdrawing funds in the early years (usually the first 5–10) may trigger surrender charges. Always review your contract terms before accessing funds.

3. Fees

Variable annuities may carry higher administrative and investment management fees, which can reduce overall returns. Fixed and fixed index annuities typically offer lower, more transparent fee structures.

Who Should Consider a Non-Qualified Annuity?

Non-qualified annuities are especially appealing if you:

• Have already maximized your IRA or 401(k) contributions
• Want additional tax-deferred savings and protected growth
• Need reliable retirement income or lifetime payout options
• Plan for long-term savings and aren’t concerned about immediate liquidity

If liquidity and lower fees are your top priorities, consider other investment vehicles—but for many, non-qualified fixed index annuities offer unique advantages not available through traditional accounts.

Conclusion: Is a Non-Qualified Annuity Right for You?

A non-qualified annuity can help you grow retirement savings tax-deferred, generate guaranteed income, and extend your estate planning options—especially if you want to contribute more than IRS limits or need extra flexibility. However, be mindful of fees, surrender charges, and the ordinary income tax treatment on growth.

As with any financial decision, it’s important to align your annuity choice with your long-term goals, liquidity needs, and tax situation. Foxcove Financial can help you evaluate whether a non-qualified fixed index annuity fits your overall retirement plan.