A non-qualified annuity is a privately purchased annuity bought outside of an employee benefit. The funds used to buy this account have already been taxed, so the initial investment is not subject to taxes once disbursed. Some common sources of funds for non-qualified annuities include:
- Mutual funds
- Non-IRA accounts
- Certificates of deposit
- Inheritance accounts
- Savings accounts
There is no limit to how much can be contributed to an annuity account, and there is no mandatory distribution age. Non-qualified annuity investments grow tax-deferred — an opportunity that allows the initial investment to accumulate interest without tax liability. As long as funds remain in this account, any income growth will not be taxed. However, as soon as the annuity begins disbursing to the annuity owner, any growth beyond the original investment will be taxed.
Similar to a qualified annuity account, early withdrawals from a non-qualified annuity before the age of 59½ are subject to a 10 percent IRS penalty.
Non-qualified annuities are unique because funds can be transferred from one policy to another without tax consequences. In a 1035 tax-free exchange, an annuitant can choose to invest in a new annuity, which in turn could help to increase income returns on an annuity account.
Similar to many annuity accounts, non-qualified annuities can include a death benefit within the contract. In the event an annuity owner dies before receiving the full disbursement value, remaining funds can be transferred to a beneficiary or an heir. If no beneficiary or heir has been listed, funds may be forfeited to the insurance company.