Qualified Annuity
A qualified annuity is an annuity contract funded with pre-tax money from a qualified retirement plan, such as a traditional IRA, 401(k), 403(b), or pension lump-sum rollover. Because the funding source was never taxed, every dollar of withdrawal or annuitization payment from a qualified annuity is fully taxable as ordinary income — there is no exclusion ratio. Qualified annuities are subject to Required Minimum Distribution (RMD) rules starting at the applicable age (currently 73, scheduled to rise to 75 under SECURE 2.0).
A 60-year-old rolls $300,000 from her former employer's 401(k) into an IRA, then purchases a MYGA inside the IRA. The MYGA is now a qualified annuity. At age 73, she must begin taking RMDs from the IRA — the carrier calculates the RMD based on her age and the contract value, and distributes that amount each year. Every dollar of distribution is taxable as ordinary income. She does not receive any exclusion ratio benefit because no after-tax basis exists in the contract.
Why it matters
The distinction between qualified and non-qualified annuities determines (1) tax treatment of every distribution, (2) applicability of RMDs, (3) early withdrawal penalty rules (the 10% IRS penalty on pre-59½ withdrawals applies more broadly to qualified contracts), and (4) eligibility for QLAC treatment (only qualified money). The qualified/non-qualified distinction follows the funding source, not the contract type.
How to evaluate
When considering an annuity purchase, identify the funding source first. Money already inside a qualified retirement account (IRA, 401(k)) makes the annuity qualified. Money from a taxable brokerage account or savings account makes it non-qualified. The same annuity contract has materially different tax outcomes depending on the funding source.
In the contract
Qualified annuities are typically labeled "IRA Annuity" or include a qualified plan endorsement. The contract identifies the type of plan (Traditional IRA, Roth IRA, Inherited IRA, 401(k), 403(b)) on the declarations page.
Related terms
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