Annuities come in many different forms. There are immediate and deferred annuities, with both fixed and variable rates. However, whatever the type of annuity, all can be classified as either qualified or nonqualified annuities. And the distinction is easy.

Qualified annuities are used in connection with tax-advantaged retirement plans, such as defined benefit pension plans, Section 403(b) retirement plans (TSAs), or IRAs. Premiums for qualified annuities are generally paid with pretax dollars, as are any investments purchased for use in a qualified retirement plan.

By definition, any annuity not used to fund a tax-advantaged retirement plan or IRA is considered a nonqualified annuity. Contributions to nonqualified annuities are made with after-tax dollars--premiums are not deductible from gross income for income tax purposes.

In essence, then, the products are the same. It is the placement in or out of a retirement plan (and the resulting tax treatment) that distinguishes one from the other.