Nonqualified Plan

An annuity or pension plan that one buys individually rather than through an employer. Nonqualified plans are not subject to the same restrictions as qualified plans. As a result, withdrawal penalties are smaller or non-existent, and one may continue to make contributions to a more advanced age (sometime until the annuitant is over 80). In the United States, specific restrictions on nonqualified plans are set at the state level. The IRS does not regulate them; as a result, contributions are not tax-deductible, but earnings still are.

Nonqualified annuity.

An annuity you buy on your own, rather than through a qualified employer sponsored retirement plan or individual retirement arrangement, is a non-qualified annuity.

Nonqualified annuities aren't governed by the federal rules that apply to qualified contracts, such as annual contribution caps and mandatory withdrawals after you turn 70 1/2.

While there may be a 10% tax penalty for withdrawals before you turn 59 1/2, you can generally put up to $1 million in an annuity and postpone withdrawals until you're 75 or 80 or older. Those limits are set by the state where you purchase the contract or by the annuity company.

In other ways, though, qualified and nonqualified annuities are alike. You can choose between fixed or variable contracts, and the annuity can be either deferred or immediate.

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References in periodicals archive

This distribution method essentially treats the nonqualified annuity death benefit as an inherited IRA (i.e., required to take Table I RMDs, with the balance growing tax-deferred during this individual's lifetime).

20 questions on the evolving role of tax-deferred annuities

Although [section] 403(c) of the Code provides that premiums paid by an employer for a nonqualified annuity contract is includible in the gross income of an employee in accordance with [section] 83 of the Code, it appears that [section] 404(a)(5) of the Code may govern the deduction for the premiums paid for nonqualified annuity plans, instead of [section] 83(h), although this issue is not entirely free from doubt.

Tax and ERISA considerations associated with nonqualified severance benefit plans sponsored by professional C corporations