What Annuity Owners Need to Know About Qualified vs. Non-Qualified Plans
When people buy an annuity to save for retirement, one option is to do so through their employer in either a qualified or non-qualified plan.
Key things to know about qualified and non-qualified plans:
- Contributions are either made pre-tax or post-tax, depending on the plan type.
- All annuities provide tax-deferred growth — you don’t pay any taxes on earned interest until you withdraw money from the annuity.
- Retirement distributions are either taxable or tax free, depending on the plan type.
- With some plan types, you can take a loan against your policy (if the employer plan allows). With other plan types, like a Traditional IRA, loans are not allowed.
- All plans may be subject to early withdrawal penalties.
What is the difference between a qualified plan and a non-qualified plan?
Qualified plans meet the guidelines set by the Employee Retirement Income Security Act (ERISA) and must be made available to all eligible company employees. These plans are subject to strict regulations to protect employees’ retirement savings to ensure no discrimination takes place.
Non-qualified plans are not required to meet all ERISA guidelines, allowing for selective participation. Non-qualified plans can be used to provide additional benefits to key employees.
What are key characteristics of a qualified plan?
- Earnings grow tax deferred until you withdraw money.
- Annual contribution limits and strict withdrawal rules set by the IRS, including penalties for early withdrawal (before age 59½) and required minimum distributions (at 70 ½-73, depending on date of birth).
Examples of qualified plans:- 401(k) plans
- 403(b) plans
- Profit-sharing plans
- Defined benefit pension plans
What are key characteristics of a non-qualified plan?
- Earnings grow tax deferred until you withdraw money.
- Can be used to provide additional benefits to key employees or executives.
- More flexible withdrawal options.
Examples of non-qualified plans:- Deferred compensation plans
- Executive bonus plans
How do you know what kind of plan you have?
If you bought an annuity through National Life Group, you probably have one of these plan types:
- If you’re a teacher or an employee of a public school or a non-profit organization, you may have a 403(b) plan.
- If you work for a tax-exempt organization or for a state or local government, you may have a 457(b) plan.
- All others who have bought a National Life Group annuity through a retirement savings plan likely have a Traditional IRA or a ROTH IRA plan, or a non-qualified annuity.
Why should you care about the plan type?
If you have an annuity with National Life Group bought through an employer, key things to consider include:
- Tax implications related to contributions and withdrawals.
- Whether you can take a loan against your policy. (Note that if you take a loan, it will be considered a distribution if you don’t repay the loan.)
Here’s an overview of common plan types and how they differ:
Tax-Qualified Plan Type |
|||
---|---|---|---|
Pre-Tax Contribution | Tax-Deferred Growth | Retirement Distributions | Loan Availability |
403(b) | Yes | All Distributions are Taxable | Yes, if Plan Allows |
457(b) | Yes | All Distributions are Taxable | Yes, if Plan Allows |
401(k) | Yes | All Distributions are Taxable | Yes, if Plan Allows |
401(a) | Yes | All Distributions are Taxable | Yes, if Plan Allows |
Traditional IRA | Yes | All Distributions are Taxable | No |
SEP IRA | Yes | All Distributions are Taxable | No |
SIMPLE IRA | Yes | All Distributions are Taxable | No |
Pension Plan | Yes | All Distributions are Taxable | No |
After-Tax Contribution | |||
Roth 403(b) | Yes | Not Taxable | Yes, If Plan Allows |
Roth 457(b) | Yes | Not Taxable | Yes, If Plan Allows |
Roth 401(k) | Yes | Not Taxable | Yes, If Plan Allows |
Roth IRA | Yes | Not Taxable | No |
Roth SEP IRA | Yes | Not Taxable | No |
Roth SIMPLE IRA | Yes | Not Taxable | No |
Non-Qualified Annuity | Yes | Only Gains Are Taxed | No |
If loans are allowed, should I take a loan instead of withdrawing money from my annuity when I need cash?
Whether you should withdraw money or take a loan depends on your specific situation and needs. Here are some of the pros and cons of both options:
Loans | Withdrawals | |
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Pros |
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Cons |
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I have taken a loan in the past — how can I make a repayment?
Loans can be repaid at any time using the mobile app, online customer portal, or by sending in a payment. Important: Payments intended for repaying a loan should be clearly marked as such. Otherwise, they will be considered premium payments.
Next Steps
- Have more questions? Contact your employer or our Customer Experience Center (if you have a National Life Group life policy).
- Learn about annuity types sold by National Life Group.
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