Qualified annuities are purchased to fund qualified retirement plans, such as IRAs, 401(k) plans, or SEPs. They may also be used for rollovers and transfers from other retirement accounts.
During the accumulation phase, premiums paid are considered "before-tax" income; therefore, during the distribution phase the entire contract value (principal and interest) is subject to income taxes. The exception is a Roth IRA, which is funded with after-tax contributions, but which may provide tax-free income under certain circumstances.
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