FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationRegulatory Fundamentals and General Product KnowledgeMedium
A client, aged 58, is considering purchasing a variable annuity and is primarily concerned with the ability to transfer assets between subaccounts without incurring immediate tax liabilities. Which of the following statements accurately describes the tax implications of such transfers within a variable annuity?
- ATransfers between subaccounts are taxable events, and any gains realized are subject to ordinary income tax.
- BTransfers between subaccounts are subject to capital gains tax, regardless of whether a gain is realized.
- CTransfers between subaccounts within a variable annuity are generally not considered taxable events.
- DTransfers between subaccounts are taxable events, but only if the transfer results in a net gain for the investor.
Show answer & explanationAnswer & explanation
Correct answer: C. Transfers between subaccounts within a variable annuity are generally not considered taxable events.
One of the key benefits of variable annuities is tax-deferred growth, which extends to the ability to reallocate investments among subaccounts without triggering immediate tax consequences. This allows investors to adjust their portfolios without incurring capital gains or ordinary income taxes until withdrawal.
Why the other options are wrong
- A. This is incorrect; internal transfers within a variable annuity are tax-deferred.
- B. This is incorrect; capital gains tax is not incurred on internal subaccount transfers within a variable annuity.
- D. This is incorrect; even if a gain is realized, it is tax-deferred until withdrawal.
Variable Annuity Tax Deferral (Subaccount Transfers)
Transfers of assets between subaccounts within a variable annuity are generally not considered taxable events, allowing for tax-deferred growth and portfolio rebalancing.
- Gains are tax-deferred until withdrawal.
- Allows for rebalancing without immediate tax consequences.
- A key benefit of variable annuities.
Memory trick: Variable annuities offer a shield for your gains, letting you move money around without the taxman's gaze until you cash out.