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How nonqualified annuities can fit with a tax-efficient retirement plan

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As you near retirement, it's normal to wonder if you'll have enough resources to live the life you've dreamed of. An annuity could give you financial confidence that you'll have what you need for life.

Nonqualified annuities come with tax advantages that could round out your investment portfolio, especially if you've already maxed out your contributions to a 401(k), IRA or other retirement plan.

Here's how nonqualified annuities work and whether one may be a good option for you.

What is an annuity?

Annuities are insurance contracts that may provide lifetime income in exchange for a lump sum or series of payments. You can choose from several types of annuities. Some contracts provide income as soon as you make a one-time premium, while others are funded for you to access at a later date. You can opt for a fixed annuity that's protected from market volatility, or you can take more risk with a variable annuity and select investment options that move with the markets. The best option for you depends on when you want the income and your risk tolerance, among other factors.

What is a nonqualified annuity?

An annuity can be either qualified or nonqualified. Nonqualified annuities are funded with after-tax dollars while qualified annuities are purchased with pre-tax dollars. How you fund your annuity determines how you're taxed on the income when you take distributions from it.

With a nonqualified annuity, you've already paid taxes on the money you contributed to the contract. So when you take money out, you're only taxed on any gains—your contribution's appreciation in value. This differs from a qualified annuity, where withdrawals, both principal and any growth, are subject to income tax when you withdraw, since you funded the contract with pre-tax dollars.

Having a variety of investments with different tax timelines is a diversification strategy that spreads out your tax burden and can help you save money in the long run. If you think of investments as taxed now, taxed later or taxed never, you can see how qualified annuities (taxed later) and nonqualified annuities (taxed now and later) can both have a place in your portfolio. They may help to minimize your tax liability now and in the future.

Taxation of nonqualified annuities

Nonqualified annuities are exempt from many of the IRS restrictions that come with qualified retirement accounts. Knowing the key features can help you decide if and how this annuity may fit into your retirement savings plan.

You get tax-free withdrawals of the principal

Withdrawals from the principal balance are tax-free. You'll only be taxed on any earnings the account accumulates. Spreading out this tax burden could result in significant tax savings if, for example, you expect to be in a higher tax bracket in retirement.

You won't have an annual contribution limit

A nonqualified annuity doesn't have an annual contribution limit. For example, while a 401(k) is limited to a $23,000 annual contribution in 2024 ($30,500 if you're 50 or older), you can contribute to nonqualified annuities as much as the contract provider allows. Higher annual contributions could be a critical part of your retirement strategy if you're saving later in life and looking to catch up.

You don't have to take required minimum distributions

Some qualified accounts require you to start taking required minimum distributions (RMDs) by a certain age. An individual retirement account (IRA), for example, has RMDs at age 73—meaning you have to start taking money out of your IRA the year you turn 73 (or by April 1 of the following year).

Nonqualified annuities don't have RMDs. It's possible to set your annuity date for after you turn 73, giving your money more time to potentially accumulate growth.

You'll pay less tax penalties if you make an early withdrawal

In most cases, if you withdraw money from a qualified annuity before age 59½, you face a 10% federal tax penalty (the same as you would for an early withdrawal from most tax-deferred retirement accounts). With a nonqualified account, if you take money out early, you may be subject to the 10% penalty only on the earnings, since you've already paid taxes on your contributions.

  • Be advised: Withdrawals are always on an earning-out-first basis.
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Taxes & retirement:
Are you prepared?

A tax-efficient portfolio may help to maximize your retirement income. Check out our guide on how to diversify your investments' tax liability so you can keep doing more with what you've been given.

Learn more

Pros & cons of a nonqualified annuity

A nonqualified annuity has benefits and drawbacks. Consider these as you decide if this annuity can help prolong your income and care for your needs in retirement:


  • No contribution limit or RMDs
  • Potential for tax-deferred earnings
  • No tax when your premiums are returned to you


  • Can only contribute after-tax dollars

Considerations before getting a nonqualified annuity

Even after factoring in the taxation of nonqualified annuities, consider these situations to help decide if a nonqualified annuity is right for you:

When a nonqualified annuity could make sense

In most cases, you first want to max out contributions to an employer-sponsored retirement plan or other qualified account, like an IRA. These plans usually come with pre-tax contributions and maybe even an employer match. But after maxing out your qualified plans, you could build more tax-advantaged savings in a nonqualified annuity.

Also, if you expect to be in a higher tax bracket in retirement than you are now, it could benefit you to contribute after-tax dollars to a nonqualified annuity during your lower-income-tax-rate years and then pay taxes at the higher rate later only on the earnings when you take distributions.

When a nonqualified annuity may not make sense

In some situations, you may want to pause before committing to a nonqualified annuity. Consider if it would be more tax-efficient for you to reach your contribution (and catch-up) limits with your qualified retirement plans first. You may even want to think about the possibility of using those accounts to purchase a qualified annuity.

Deciding if a nonqualified annuity fits with your plans

Doing the most with what you've been given includes adopting a tax-diverse investment strategy—spreading out the income tax liability on your assets. It can be an ideal option if you've already maxed out your qualified retirement plans and want an additional tax-deferred product option.

Discuss your goals with a Thrivent financial advisor to see if a nonqualified annuity is the best move for you.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Guarantees based on the financial strength and claims paying ability of the product’s issuer. 

Concepts presented are intended for educational purposes. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product. 

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits. 

Withdrawals and surrenders will decrease the value of your annuity and, subsequently, the income you receive.