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Qualified annuity: What it is & how it works

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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 IRS contribution limits. Plans that have pre-tax contributions allow you to lower your taxable income and enjoy immediate tax savings. (Note: Roth IRAs have different requirements.) A qualified annuity grows tax-deferred, where you only pay income tax when you withdraw money from the contract.

In contrast, nonqualified annuities are funded with money you've already paid taxes on. You don't receive immediate tax savings when you contribute to a nonqualified annuity. Withdrawals are only taxed on any earnings. Your contributions to the annuity as its principal, or cost basis, are tax-free.

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 tax-efficient retirement plan.

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 403(b). An employer sponsors a 403(b) but the employee manages it. You can select how much and where your money goes based on the options available to you. 403(b) contributions are deducted from your paycheck pre-tax, and any earnings within an annuity grow tax-deferred.

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.


traditional IRA is a retirement plan independent of your employer that you can contribute to with pre-tax dollars. A Roth IRA is also independent of your employer, but any contributions are after-tax. It's up to you how much you contribute monthly and where you invest. As with other qualified accounts, money in your IRA can grow tax-deferred.

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).

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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 Thrivent financial advisor can help you assess whether a qualified annuity aligns with your goals and values, so you can retire confidently.

*SECURE Act 2.0 raised the RMD age from 72 to 73 for those individuals who attain age 72 after 2022 and age 73 before 2033. In the case of an individual who attains age 74 after 2032, the applicable age is 75.

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. 

Holding an annuity inside a tax-qualified plan does not provide any additional tax benefits. Withdrawals made prior to the age of 59 ½ may be subject to a 10 percent federal tax penalty.  Withdrawals and surrenders will decrease the value of your annuity and, subsequently, the income you receive. Any withdrawals in excess of 10% may be subject to a surrender charge. The taxable portion of each annuity distribution is subject to income taxation. If a taxpayer is younger than 59½ at the time of distribution, a 10% federal tax penalty will apply to the taxable portion of the distribution unless a penalty-tax exception applies.

There may be benefits to leaving your account in your employer plan, if allowed. You will continue to benefit from tax deferral, there may be investment options unique to your plan, fees and expenses may be lower, plan assets have unlimited protection from creditors under Federal law, there is a possibility for loans, and distributions are penalty free if you terminate service at age 55+.  Consult your tax professional prior to requesting a rollover from your employer plan.

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.