Tax Treatment of Variable Annuity Contracts
Chapters in this video
- 0:00 The LIFO withdrawal trap in accumulation
- 1:37 Age 59 1/2 and the 10% early withdrawal penalty
- 2:24 Annuitization and the exclusion ratio
- 3:32 Surrender charges do not reduce taxable gain
- 4:38 Qualified versus non-qualified annuity distinction
- 5:41 Gains are always ordinary income, never capital gains
- 6:59 Rapid-fire exam recap
What this video covers
- Why last in, first out (LIFO) governs non-qualified annuity withdrawals and why earnings are taxed as ordinary income before any tax-free basis is returned
- How the 10% early withdrawal penalty applies to the taxable portion of distributions taken before age 59 1/2
- What the exclusion ratio is, how it splits each annuitized payment into tax-free basis recovery and taxable ordinary income, and what happens after full basis recovery
- Why surrender charges reduce the amount received but do NOT reduce taxable gain upon full surrender of the contract
- How qualified annuities differ from non-qualified annuities: pre-tax funding, zero cost basis, and 100% ordinary income taxation on all distributions
- Why variable annuity gains are always taxed as ordinary income regardless of underlying subaccount type, holding period, or source of gains
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