Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Life Insurance and AnnuitiesHard
A Florida couple purchases a variable annuity. During the accumulation period, they decide to reallocate their investment among the various subaccounts offered by the insurer. What is the typical tax implication of such a reallocation within the annuity's separate account?
- AIt is considered a taxable event, and any gains are immediately taxed as capital gains.
- BIt results in a penalty tax if the annuitant is under age 59½.
- CIt is not considered a taxable event, as the funds remain within the annuity contract.
- DIt is considered a taxable event, and any gains are immediately taxed as ordinary income.
Show answer & explanationAnswer & explanation
Correct answer: C. It is not considered a taxable event, as the funds remain within the annuity contract.
One of the key tax advantages of annuities is tax-deferred growth. Reallocating funds among subaccounts within the same annuity contract during the accumulation period is not considered a taxable event because the funds are not withdrawn from the contract. Taxes are deferred until withdrawal.
Why the other options are wrong
- A. Gains are not taxed until withdrawal, and then as ordinary income, not capital gains.
- B. The penalty tax applies to early withdrawals from the annuity, not internal reallocations.
- D. Gains are not taxed until withdrawal, and then as ordinary income (LIFO).
Annuity Tax-Deferred Growth
Investment gains within an annuity contract are not taxed until funds are withdrawn, allowing for tax-free internal reallocations.
- Earnings grow tax-deferred.
- Internal transfers between subaccounts are not taxable events.
- Taxes are paid upon withdrawal or annuitization.
Memory trick: Grow it, move it, don't show it (to IRS) 'til you blow it (out).