Q:
An individual made a lump-sum 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 tax-deferred growth, using the IRS table called the Treasury Life Expectancy Multiple.
b) She will be subject to immediate taxation, at the long-term 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 long-term gains rate.
A:
The correct answer is c).
Early withdrawal from a non-qualified annuity--prior 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 (last-in, first-out) taxes apply. The annuity holder never pays taxes on the cost basis again.

RELATED FAQS

  1. How are non-qualified variable annuities taxed?

    Reduce your tax bill by knowing the tax advantages and disadvantages to owning or inheriting a non-qualified variable annuity ...
RELATED TERMS
  1. Deferred Annuity

    A type of annuity contract that delays payments of income, installments ...
  2. Variable Annuity

    An insurance contract in which, at the end of the accumulation ...
  3. Ordinary Annuity

    A series of equal payments made at the end of each period over ...
  4. Wraparound Annuity

    A type of annuity that allows the investor (the holder of the ...
  5. Valuation Period

    The time between the end of the business day of the first business ...
  6. Annuity In Advance

    An amount of money that is regularly paid at the beginning of ...
Hot Definitions
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  2. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  3. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  4. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  5. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
  6. Dark Pool

    A dark pool is a private financial forum or exchange for trading securities.
Trading Center