What does it mean if an annuity is classified as "non-qualified"?

A non-qualified annuity is one that is funded with after-tax dollars. This means that the money used to purchase the annuity has already been taxed before it is invested in the annuity. Consequently, when funds are later withdrawn from a non-qualified annuity, only the earnings are subject to income tax, while the principal or the initial investment is not taxed again.

This classification is important because it differentiates non-qualified annuities from qualified annuities, which are funded with pre-tax dollars, typically through retirement accounts like IRAs or 401(k)s. Knowing the tax implications of each type can help investors understand their potential liabilities and benefits, allowing for informed decisions about their retirement planning and savings strategies.