CLU Annuities and Retirement Planning 2 — Questions and Answers
Question 1: What is the penalty for withdrawals from a tax-deferred annuity before age 59½, in addition to ordinary income tax?
- 5% federal penalty
- 10% federal early withdrawal penalty (Correct answer)
- 15% federal penalty
- 20% withholding tax
Correct answer: 10% federal early withdrawal penalty
Like other tax-deferred retirement vehicles, nonqualified annuity withdrawals of gain before age 59½ are subject to a 10% federal penalty tax under IRC Section 72(q).
Question 2: In a variable annuity, how is the account value determined during the accumulation phase?
- By a guaranteed fixed interest rate set at issue
- By the performance of the underlying investment subaccounts chosen by the owner (Correct answer)
- By the insurance company's general account portfolio returns
- By index performance subject to a participation rate cap
Correct answer: By the performance of the underlying investment subaccounts chosen by the owner
Variable annuity values fluctuate based on the investment performance of the owner-selected subaccounts, which function similarly to mutual funds, bearing all market risk.
Question 3: What is a 'joint and survivor' annuity payout option?
- Payments guaranteed for a fixed period, then cease
- Payments continue over the lifetimes of two named individuals (Correct answer)
- A single life annuity with a return-of-premium guarantee
- An annuity that adjusts payments for inflation
Correct answer: Payments continue over the lifetimes of two named individuals
A joint and survivor annuity provides income for as long as either of two annuitants is alive, with payments often reducing (e.g., 50% or 66⅔%) after the first annuitant dies.
Question 4: What is the required minimum distribution (RMD) starting age for qualified annuities and IRAs under current federal law (SECURE 2.0)?
- Age 70½
- Age 72
- Age 73 (Correct answer)
- Age 75
Correct answer: Age 73
SECURE 2.0 Act raised the RMD beginning age to 73 for individuals who reach age 72 after December 31, 2022, with a further increase to 75 scheduled for 2033.
Question 5: Which type of annuity begins income payments immediately — typically within one month of a single lump-sum premium payment?
- Deferred annuity
- Single premium immediate annuity (SPIA) (Correct answer)
- Flexible premium deferred annuity
- Variable deferred annuity
Correct answer: Single premium immediate annuity (SPIA)
A single premium immediate annuity (SPIA) converts a lump-sum premium into a stream of income payments beginning almost immediately, making it ideal for retirees needing current income.
Question 6: What is the '1035 exchange' and what tax benefit does it provide to annuity owners?
- A tax-free transfer of a life insurance policy to another life policy or to an annuity (Correct answer)
- A tax deduction for annuity premiums paid during the year
- An exemption from the 10% early withdrawal penalty for disabled individuals
- A stepped-up cost basis at the annuitant's death
Correct answer: A tax-free transfer of a life insurance policy to another life policy or to an annuity
IRC Section 1035 permits a tax-free exchange of a life insurance policy for another life policy, endowment, or annuity — or one annuity for another — without triggering income tax on any accumulated gain.
CLU Annuities and Retirement Planning 2
What is the penalty for withdrawals from a tax-deferred annuity before age 59½, in addition to ordinary income tax?