- There are two types of annuities, qualified and non-qualified. Those with qualified annuities are allowed to make pretax or tax deductible contributions. The plans that allow pretax contributions include 403b plans, 412i plans and defined benefit pension plans. Other qualified annuities allow tax deductible contributions, but not pretax contributions. These plans are Individual Retirement Accounts.
- Pretax contributions mean just that. The amount of money you contribute to the account is made before any taxes are assessed on your contribution amount. This money is thus considered an elective deferral by the IRS. All such contributions receive the benefit of the qualified plan with which it is associated. For example, 403b plans containing annuity policies receive the benefit of the pretax contribution allowance, even though annuities normally aren't allowed to receive pretax contributions.
- A tax deductible contribution works a bit differently than a pretax contribution. With a tax deductible contribution, you are taxed on your income before you make the contribution to the annuity inside your IRA. When you file your tax return, you deduct the amount of your contribution, up to $5,000, from your taxable income.
- When you make a pretax contribution to a retirement plan, you're not allowed to also deduct this amount from your taxes when you file your tax return. If you think about it, this makes perfect sense. The IRS won't allow two tax deductions on the same contribution, which is effectively what would be happening. Instead of receiving the tax deduction, you simply don't receive any money in your paycheck. The money is deferred into your annuity. Thus, there's no tax assessed and nothing to deduct.
Types
Pretax
Tax Deductible
Effect
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