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. Which of the following statements is (are) true with respect to the calculation of ...

    The correct answer is: a) (I) is incorrect because results that cover a period of less than a year must "not" be annualized. ...
  2. Which of the following terms are associated with the purchase/redemption of open-end ...

    The correct answer is b. Forward pricing is the SEC Rule that requires all transactions in open-end investment company shares ...
  3. Joanne Bume, CFA, is the head of research at large brokerage firm ...

    The correct answer is: a) The proper course of action would simply be to place Universal Airlines on a restricted list until ...
  4. A registered representative has been following PDQ stock in the market over the past ...

    The correct answer is c. Current yield compares the current price of acquiring the stock to the income from the stock, the ...
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. Insurance

    Municipal Bond Tips For The Series 7 ...

  2. Retirement

    6 Proven Tips For Series 6 Success

  3. Insurance

    Tips For Passing The Series 6 Exam

  4. Professionals

    Banker Or Broker: Which Career Is Right ...

  5. Professionals

    Breaking Down Financial Securities Licenses

Trading Center