An individual made a lump-sum deposit into a variable annuity of $25,000 ...

By Investopedia Staff AAA
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. I need special accommodations when taking the Series 63 exam. How are such arrangements ...

    Learn more about special accommodations offered by Series 63 testing sites, and discover how to request special accommodations ...
  2. Do I need a class to take the Series 63 exam?

    Learn more about the educational requirements for the Series 63 and what candidates should study. Find out more about NASAA ...
  3. How many attempts at the Series 7 exam are permitted?

    The National Association of Securities Dealers (NASD) has not placed any limits on the number of times you can attempt to ...
  4. I have passed the Series 63 and FINRA Series 7, but would like to become licensed ...

    Becoming an investment adviser representative requires more examination than just taking the FINRA Series 63 exam. See what ...
RELATED TERMS
  1. Series 79

    A examination to ensure a candidate is qualified to become a ...
  2. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  3. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  4. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  5. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
  6. Series 28

    An exam given by the Financial Industry Regulatory Authority ...

You May Also Like

Related Articles
  1. Professionals

    Should You Add A Securities License ...

Trading Center