Question of the Week

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.

Answer:

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.


Professionals FAQs
  1. Where can I look for a financial planner?

    References from trusted friends or family members can help you find a financial planner; however, keep in mind that your friends' financial situations and goals may differ from yours and, therefore, their planners won't necessarily be the best fit for you.The Certified Financial Planner (CFP) Board of Standards certifies financial planners and maintains an online list of certified financial planners on its CFP Board of Standards website.
  2. If I am looking to get an Investment Banking job. What education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The caveat here is that the MBA would most probably need to be from a Top-20 B-School.The Chartered Financial Analyst (CFA) is well worth considering if you (a) are aiming for an entry-level position in investment banking, and/or (b) cannot afford to shell out six figures for an MBA or have to settle for a lesser-known B-school.That's because in the investment banking field, most entry-level positions are at the analyst level.
  3. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't count on it. The CFA Institute has long emphasized that ethics is a particular area of focus for it. The seriousness with which the CFA Institute views ethics is evident from the fact that for exam candidates with borderline total scores, performance on the ethics section can mean the difference between passing and failing the exam.
  4. Under the USA, registration as an IAR includes all of the following EXCEPT:

    Under the USA, registration as an IAR includes all of the following EXCEPT: A. Minimum net capitalB. Passing a qualification examC. Filing a consent to service of processD. Posting a surety bond The correct answer is "A", since only an IA would need to prove minimum net capital requirements.