As you've saved for retirement, you've probably heard the terms "Roth" and "traditional" when describing accounts like a 401(k) or IRA. These categories determine when, and how, your contributions and withdrawals are taxed. With annuities, you have similar options that are also tied to tax implications: qualified, or nonqualified. Each come with their own features and tradeoffs. Here's how to determine if a qualified annuity is right for you.
What is a qualified annuity?
A qualified annuity is an annuity product purchased within a tax-deferred plan such as an individual retirement account (IRA). You buy it with pre-tax dollars up to
These distinctions are important so you can know when and how much income tax may be due on your different retirement products. With a thoughtful strategy, you can make informed decisions on when to take money out of each retirement product. Understanding how qualified and nonqualified annuity taxation works is one of many ways to help you create a
Common types of plans for qualified annuities
Qualified annuities are purchased within a qualified retirement plan that complies with IRS regulations to maintain their tax advantages. This means qualified annuities are most often used with individual retirement plans such as traditional IRAs or Roth IRAs. Regardless, all feature the potential for tax-deferred growth.
These common retirement plans work within annuities:
Government employers, nonprofit organizations and other tax-exempt groups may offer retirement plans that work similarly to a 401(k), called a
Annual contribution limits for a 403(b) in 2024 are the same as those for a 401(k)—$23,000 annually or $30,500 for people age 50 or older. Also, if your 403(b) plan permits, may be able to contribute an additional $3,000 (up to $15,000 in your lifetime) if you've worked for your employer for at least 15 years. You must take RMDs from your 403(b) by age 73* (or by April 1 of the following year) and pay income taxes on your withdrawals.
You can purchase an IRA regardless of where you work as long as you have earned income. However, IRAs have much lower contribution limits than a 401(k) or 403(b). In 2024, you can contribute no more than $7,000 annually to an IRA ($8,000 if 50 or older). And you'll still have to take RMDs from your IRA by age 73 (or April 1 of the following year).
Pros & cons of qualified annuities
Even with the tax benefits, qualified annuities have advantages and drawbacks. Here are a few factors to consider as you evaluate your retirement plan options.
- Typically funded with pre-tax contributions. Roth IRA contributions are after-tax.
- Any growth is tax-deferred.
- Can be either an individual plan or an employer-sponsored plan.
- Annual contribution limits.
- You must take required minimum distributions (unless within a Roth IRA).
- Withdrawals subject to income tax.
When to consider getting a qualified annuity
A qualified annuity's guaranteed income options could complement your other retirement products, letting you feel more confident in your long-term financial plan. You may consider a qualified annuity if:
You've maxed out your employer-sponsored retirement plan
Once you've maxed out your employer-sponsored retirement plan, you may be interested in contributing to a traditional IRA or Roth IRA annuity. These plans held within an annuity can provide additional income options in retirement.
You are taking money out of an employer-sponsored plan
When considering your rollover options, you may want a traditional IRA in an annuity to provide guaranteed income in retirement.
Learn how qualified annuities might fit with your retirement plans
Adding a qualified annuity to your retirement plan may bring balance and stability to your income once you leave the workforce. A