Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Life Insurance and AnnuitiesMedium
A Florida resident purchases a single premium deferred annuity. Which of the following statements accurately describes the taxation of withdrawals made during the accumulation phase, specifically regarding the 'last-in, first-out' (LIFO) rule?
- AWithdrawals are prorated between premium and earnings, with each portion taxed accordingly.
- BWithdrawals are first considered earnings and are taxable, then premium, which is tax-free.
- CWithdrawals are entirely tax-free if the annuitant is over age 59½, regardless of whether they are earnings or principal.
- DAll withdrawals are considered a return of premium and are tax-free until the entire principal has been recovered.
Show answer & explanationAnswer & explanation
Correct answer: B. Withdrawals are first considered earnings and are taxable, then premium, which is tax-free.
Under the LIFO rule for annuities during the accumulation phase, withdrawals are assumed to come from earnings first, which are taxable, and then from the principal (cost basis), which is tax-free.
Why the other options are wrong
- A. This describes a pro-rata rule, which is not the standard for non-qualified annuity withdrawals during accumulation.
- C. The age 59½ rule pertains to the 10% penalty, not the taxability of earnings themselves.
- D. This describes the FIFO rule, which is not typically applied to annuity withdrawals during accumulation.
Annuity LIFO Taxation
During the accumulation phase of a non-qualified annuity, withdrawals are taxed on a 'last-in, first-out' (LIFO) basis, meaning earnings are withdrawn and taxed first, before the tax-free return of premium.
- Applies to non-qualified annuities
- During accumulation phase
- Earnings are taxed first
- Principal (cost basis) is tax-free return
Memory trick: Last In, First Out means 'E' for Earnings Exit First when you're taking money Out.