Florida 2-15 Life, Health and Variable Annuity AgentFlorida Laws and Regulations Specific to Life Insurance and AnnuitiesMedium
A Florida resident is considering purchasing a deferred annuity. Which of the following statements accurately describes the taxation of principal contributions made to this annuity if it is non-qualified?
- APrincipal contributions are tax-deductible and taxed as ordinary income upon withdrawal.
- BPrincipal contributions are tax-deductible and are tax-free upon withdrawal.
- CPrincipal contributions are made with after-tax dollars and are not taxed when withdrawn.
- DPrincipal contributions grow tax-deferred and are taxed as ordinary income upon withdrawal.
Show answer & explanationAnswer & explanation
Correct answer: C. Principal contributions are made with after-tax dollars and are not taxed when withdrawn.
For a non-qualified annuity, principal contributions are made with after-tax dollars, meaning they have already been taxed and are therefore not subject to further taxation when withdrawn. Only the earnings are taxed.
Why the other options are wrong
- A. Principal contributions to non-qualified annuities are not tax-deductible.
- B. Principal contributions are not tax-deductible for non-qualified annuities.
- D. This describes the taxation of earnings, not the principal contributions.
Non-Qualified Annuity Contributions
Contributions to an annuity made with after-tax dollars, meaning they are not tax-deductible.
- Funds have already been taxed.
- Principal contributions are returned tax-free.
- Only earnings are taxable upon withdrawal.
Memory trick: Non-qualified means 'no deduction now, no tax on principal later'.