A qualified annuity refers to tax status of funds which are used to buy an annuity. If such funds are used to buy the annuity premiums which were eligible for the IRS tax-exemption status, the annuity is then referred to as qualified annuity. In such cases, payments got to the annuity holder from the annuity are taxed on receipt of payments as the payments typically considered as a way of income.
An annuity is bought by the individuals as the form of buying future income. An annuity works as a form of a loan in reverse in which the buyer or the annuitant provides a lump sum of money to the company to buy an annuity. The annuities then pay the money back to the buyer with interests over a certain period of time. Sometimes it can offer an annuity holder with secured lifetime earnings after retirement.
Earnings on a qualified annuity plan are tax-exempted till withdraw, however there are penalties on withdrawing a qualified annuity fund very early. If the funds from a qualified annuity are taken out before age of 59 ½ and then there will be a penalty of 10% along with regular income tax. The annuity holders can be exempted from such penalty under some conditions that may include annuity payments for a lifetime. All the annuitants that are qualified for annuities should start receiving minimum payments at the age of 70 ½.
On the contrary to a qualified annuity, a non-qualified annuity is paid with the funds that already have had tax deduction.
Examples of Payment for a Qualified Annuity
All the funds utilized to buy a qualified annuity originated tax-deferred or tax-exempted origins. Every origin of the qualified funds is subjected to the penalties as well as the laws the Congress has attached to those plans. Few examples origins of the payments for a qualified annuity are:
- Keogh plan
- 401 (k) plan
- Life insurance exchanges or section 1035
- Defined Contribution Plan or Defined Benefit Plan
- Simplified Employee Pension or SEP
- Other tax-exempted savings plans