What is a qualified annuity?

A qualified annuity is specifically designed to be purchased with pre-tax dollars and is typically held within a retirement account, such as an Individual Retirement Account (IRA) or a 401(k). This classification allows the contributions to grow tax-deferred until funds are withdrawn, which usually occurs during retirement when the individual may be in a lower tax bracket. The tax advantages associated with qualified annuities incentivize individuals to save for retirement.

In contrast, choices that describe products purchased with post-tax dollars do not fall under the qualified category and are instead considered non-qualified annuities. Additionally, the statement about not being subject to IRS regulations or taxes misrepresents the nature of qualified annuities, as they are indeed governed by IRS rules, particularly concerning contribution limits and withdrawal requirements. Lastly, a guarantee of returns alone does not define a qualified annuity, as various annuities can have different features, and not all of them guarantee returns. Thus, the characteristic of being purchased with pre-tax dollars within a retirement account is what makes an annuity qualified.