CAS Annuity Distribution and Payout Strategies Flashcards
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Read the first 6 CAS Annuity Distribution and Payout Strategies flashcards as text
A 1035 exchange allows an annuity owner to:
Answer: Transfer the cash value of one annuity to another annuity tax-free
Under IRC Section 1035, an annuity owner can transfer the value from one annuity contract to another annuity on a tax-free basis, allowing repositioning without triggering immediate income tax on accumulated gains.
What is 'annuitization' in the context of annuity contracts?
Answer: Converting the contract's accumulated value into a stream of periodic income payments
Annuitization is the process of converting a deferred annuity's accumulated value into a series of regular income payments, based on the payout option selected, which may last for a lifetime or a defined period.
The 'Last In, First Out' (LIFO) tax treatment for non-qualified annuity withdrawals means:
Answer: Withdrawals are considered to come from earnings first and are fully taxable until all gain is depleted
Under LIFO rules, withdrawals from a non-qualified deferred annuity are treated as coming from earnings (gain) first, making them fully taxable as ordinary income until the entire gain is withdrawn before basis is returned.
What is the federal income tax penalty for withdrawing from a non-qualified annuity before age 59½?
Answer: 10% penalty on the taxable (gain) portion of the withdrawal
Withdrawals from a non-qualified annuity before age 59½ are subject to a 10% federal tax penalty on the taxable (earnings) portion of the withdrawal, in addition to ordinary income tax on that amount.
When a deferred annuity owner dies before annuitization, the 'five-year rule' for non-spouse beneficiaries requires that:
Answer: The entire death benefit must be distributed within five years of the owner's death
Under the five-year rule, a non-spouse beneficiary of a non-qualified deferred annuity must take the entire death benefit distribution within five years of the original owner's death.
Which strategy involves purchasing an immediate annuity with a portion of retirement savings to cover essential expenses while investing the rest?
Answer: Income flooring strategy
An income flooring strategy uses an immediate annuity to cover essential, non-discretionary expenses (the 'floor'), while the remaining assets are invested for growth and discretionary spending.