RAA RAA Tax Planning & Tax-Advantaged Strategies 2 — Questions and Answers
Question 1: Which of the following best describes the tax treatment of annuity death benefits paid to a non-spouse beneficiary?
- Benefits are always income-tax-free
- Only the gain above basis is taxable as ordinary income (Correct answer)
- Benefits receive a stepped-up cost basis
- Benefits are taxed at estate tax rates only
Correct answer: Only the gain above basis is taxable as ordinary income
Non-spouse beneficiaries must pay ordinary income tax on the portion of death benefits that exceeds the owner's cost basis in the contract.
Question 2: When must a non-qualified annuity owner begin distributions according to IRS rules if they die before annuitization?
- Within 1 year
- Within 5 years or over the beneficiary's life expectancy (Correct answer)
- Immediately upon death
- At the beneficiary's age 72
Correct answer: Within 5 years or over the beneficiary's life expectancy
IRS rules require that non-qualified annuity proceeds be distributed within 5 years of the owner's death, or over the beneficiary's life expectancy if begun within one year.
Question 3: How does investing inside an annuity wrapper affect the tax efficiency of already tax-advantaged bond interest?
- It further reduces tax
- It has no impact since bonds are tax-free
- It adds a layer of cost without additional tax benefit (Correct answer)
- It converts interest income to capital gains
Correct answer: It adds a layer of cost without additional tax benefit
Placing tax-advantaged bonds inside an annuity adds insurance costs without an additional tax benefit, making the annuity wrapper potentially inefficient for those assets.
Question 4: A client wants to convert a lump-sum IRA into lifetime income through a qualified longevity annuity contract (QLAC). What is the maximum amount that can be invested?
- $50,000
- $130,000 or 25% of IRA balance, whichever is less (Correct answer)
- $200,000
- $1,000,000
Correct answer: $130,000 or 25% of IRA balance, whichever is less
As of current IRS limits, up to $130,000 (or 25% of the IRA balance, whichever is less) can be placed into a QLAC and excluded from RMD calculations.
Question 5: Which tax strategy allows a client to use annuity proceeds to purchase a charitable gift annuity and potentially reduce taxable income?
- 1035 exchange to a charitable gift annuity (Correct answer)
- Qualified Charitable Distribution (QCD)
- Annuity stretch provision
- Cost basis carryover election
Correct answer: 1035 exchange to a charitable gift annuity
A 1035 exchange can be used to move funds into a charitable gift annuity, which may generate a partial charitable deduction and provide lifetime income.
Question 6: For an annuity held inside a Roth IRA, how are qualified distributions generally taxed?
- As ordinary income
- At capital gains rates
- Tax-free (Correct answer)
- Subject to 10% penalty only
Correct answer: Tax-free
Qualified distributions from a Roth IRA annuity are income-tax-free because Roth contributions are made with after-tax dollars.
RAA RAA Tax Planning & Tax-Advantaged Strategies 2
Which of the following best describes the tax treatment of annuity death benefits paid to a non-spouse beneficiary?