Question

At the age of 40, Kenedy deposited $50,000 in a noqualfied, single premium deferred annuity, Ten years later, she surrenders the contract for a lump sum distribution of its $100,000 value. Which of the following statements is correct

A) kennedy will owe taxes on $50,000
B) kennedy will owe taxes on the full $100,000
C) kennedy will owe taxes and a 10% penalty on the full 100,000
D) kennedy will owe taxes and a 10% penalty on 50,000

Answer 1

The correct answer is B) Kennedy will owe taxes on the full $100,000.

A single premium deferred annuity is a type of investment that allows an individual to deposit a lump sum of money into the contract, and then receive regular payments at a later date, typically during retirement. The growth on the investment is tax-deferred until the funds are withdrawn.

When Kennedy surrenders the contract for a lump sum distribution after ten years, she will owe taxes on the entire amount of growth, which is the difference between the initial investment of $50,000 and the current value of $100,000. The amount of taxes owed will depend on Kennedy's tax bracket and other factors. However, because Kennedy is under the age of 59½, she may also owe an additional 10% penalty on the taxable amount.

Answer 2

Kenedy will owe taxes on the full $100,000 when she surrenders the deferred annuity contract.

The reason for this is because Kenedy deposited the money into a no-qualified, single premium deferred annuity. This type of annuity is funded with after-tax dollars, meaning that Kenedy already paid taxes on the $50,000 when she initially deposited it.

However, the earnings on the annuity, which increased the value of the contract to $100,000, have not been taxed yet. When Kenedy surrenders the annuity contract for a lump sum distribution, the earnings will be subject to ordinary income taxes in the year of distribution.

Additionally, if Kenedy surrenders the annuity contract before age 59 1/2, she may also be subject to a 10% early withdrawal penalty on the earnings portion of the distribution.