RAA RAA Tax Planning & Tax-Advantaged Strategies 1 — Questions and Answers
Question 1: How are earnings inside a non-qualified deferred annuity taxed during the accumulation phase?
- Tax-free permanently
- Tax-deferred until withdrawal (Correct answer)
- Taxed annually as ordinary income
- Taxed at capital gains rates annually
Correct answer: Tax-deferred until withdrawal
Earnings inside a non-qualified deferred annuity grow tax-deferred, meaning taxes are owed only upon withdrawal.
Question 2: Which IRS rule determines the taxable portion of non-qualified annuity withdrawals?
- FIFO rule
- LIFO rule (Correct answer)
- Pro-rata rule
- Exclusion ratio
Correct answer: LIFO rule
The IRS applies the LIFO (last-in, first-out) rule to non-qualified annuity withdrawals, so earnings come out first and are fully taxable.
Question 3: A client receives annuity payments from a qualified annuity funded with pre-tax dollars. How are those payments taxed?
- Only the gain portion is taxable
- Payments are entirely tax-free
- Payments are 100% taxable as ordinary income (Correct answer)
- Payments are taxed at long-term capital gains rates
Correct answer: Payments are 100% taxable as ordinary income
Because the original contributions were made with pre-tax dollars, all distributions from a qualified annuity are fully taxable as ordinary income.
Question 4: What is the federal tax penalty for withdrawing annuity earnings before age 59½?
- 5%
- 10% (Correct answer)
- 15%
- 20%
Correct answer: 10%
The IRS imposes a 10% early withdrawal penalty on taxable annuity earnings taken before age 59½, in addition to ordinary income tax.
Question 5: Which annuity payout option provides the highest exclusion ratio for a non-qualified annuity?
- Life only annuity with a long life expectancy (Correct answer)
- Lump-sum withdrawal
- Systematic partial withdrawals
- Interest-only withdrawals
Correct answer: Life only annuity with a long life expectancy
A life-only annuity spreads the return of cost basis evenly over the annuitant's life expectancy, producing the highest exclusion ratio when life expectancy is long.
Question 6: Under a 1035 exchange, which tax advantage is preserved?
- The original premium becomes tax-free
- Accumulated gains are transferred without triggering current income tax (Correct answer)
- The new annuity's surrender charge period resets to zero
- The policy owner avoids all future taxes permanently
Correct answer: Accumulated gains are transferred without triggering current income tax
A 1035 exchange allows an annuity owner to transfer accumulated gains to a new annuity contract without recognizing those gains as taxable income at the time of the exchange.
RAA RAA Tax Planning & Tax-Advantaged Strategies 1
How are earnings inside a non-qualified deferred annuity taxed during the accumulation phase?