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How Is My Annuity Taxed?

Richard Ericson

How annuities are taxed can be dependent on the types of funds you use to invest in the annuity. When you invest with qualified funds, withdrawals are taxed as ordinary income. When you invest in an annuity contract with non-qualified funds, withdrawals are taxed as ordinary income until you get to the principal, which has already been taxed. When you use tax-free or Roth investments to fund your annuity contract, withdrawals maintain their tax-free status.

Qualified – The first and most common option is utilizing an existing qualified account, such as an IRA, 401k or other government-sponsored retirement account as the source of funds, which are then rolled into your annuity contract. A qualified account is a retirement account funded with pre-taxed assets, which are assets that have never been taxed, and the contribution itself may be tax-deductible. At the time of distribution or withdrawal, the funds are then taxed at ordinary income rates. Typically these distributions are taken over many years, spreading the taxes over that time. There are also IRS restrictions as to when distributions can and must be made.

Non-Qualified – A non-qualified annuity is funded with after-tax dollars, meaning you have already paid taxes on the money before it goes into the annuity. When you take money out, only the earnings are taxable as ordinary income. You can purchase a non-qualified annuity regardless of whether or not you are covered under a retirement plan at work, or have a Traditional IRA or Roth IRA. The “last in, first out” rule applies as the earnings are taxed. Once the principal is reached, the assets have already been taxed and will not be taxed again.

Roth – A Roth annuity grows and is distributed tax-free.

The tax status of your existing retirement accounts typically determines which option is best for you. Long-term planning, along with determining which funds you want to be kept sacred and which funds you don’t want to lose, will determine the best course of action.

Here is a more complete list of the similarities and differences between qualified, non-qualified and Roth annuities:

qualified vs non-qualified annuities

About the Author:

Richard Ericson was born and raised in Salt Lake City, played quarterback for Weber State University and coached football at the Division One level for 10 years at Weber State and Utah State Universities as offensive coordinator. He now coaches individuals on how to invest safely in their retirement plans. He has had his own radio program and was featured in Fox Business News emphasizing risk-free investments. Rich’s expertise is working with business owners utilizing advanced tax strategies to reduce risk and build tax-favored and tax-free wealth. Rich received his Bachelor’s Degree in Communications and his Master’s Degree in Education from Weber State University. He is currently licensed to sell Property & Casualty, Life and Health insurance, as well as annuities. With his expertise in analyzing risk, Rich is well qualified to help individuals evaluate their opportunities to reduce tax, legal, and market risk.

Richard strongly believes that money which grows consistently and without risk is the safest investment for his clients’ retirement income. “Playing the ‘Wall Street Game’ with your sacred money is a sure way to run out of money when you need it the most,” warns Rich. He further states, “If you want to play the stock market game with 30-40% of your wealth, that’s fine, as long as you have enough money in safe, guaranteed investments to meet your retirement goals.”

He can be reached at (303) 749-5853 or


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