Q:
A:
An individual made a lumpsum deposit
into a variable annuity of $25,000 15 years ago when
she was 40. Now the current total value of the annuity
has grown to a total of $40,000. She calls her registered
representative and asks him to have the annuity company
cash in $20,000 and send her a check as soon as possible.
The registered representative should inform the client
that:
a) The withdrawal will be partially taxed, on the amount of taxdeferred growth, using the IRS table called the Treasury Life Expectancy Multiple.
b) She will be subject to immediate taxation, at the longterm gains rate, on the entire $40,000.
c) She will be subject to taxes, at the ordinary income rate on $15,000, plus a 10% penalty.
d) The $20,000 will be taxed to her at the longterm gains rate.
a) The withdrawal will be partially taxed, on the amount of taxdeferred growth, using the IRS table called the Treasury Life Expectancy Multiple.
b) She will be subject to immediate taxation, at the longterm gains rate, on the entire $40,000.
c) She will be subject to taxes, at the ordinary income rate on $15,000, plus a 10% penalty.
d) The $20,000 will be taxed to her at the longterm gains rate.
The correct answer is c).
Early withdrawal from a nonqualified annuityprior to age 59½, except for death or disability, is penalized at 10% plus ordinary taxes on the growth. This individual is making what is known as a “random withdrawal” to which LIFO (lastin, firstout) taxes apply. The annuity holder never pays taxes on the cost basis again.
Early withdrawal from a nonqualified annuityprior to age 59½, except for death or disability, is penalized at 10% plus ordinary taxes on the growth. This individual is making what is known as a “random withdrawal” to which LIFO (lastin, firstout) taxes apply. The annuity holder never pays taxes on the cost basis again.
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