Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Enhance your skills with the Series 6 exam. Access comprehensive flashcards and multiple choice questions, with detailed hints and explanations. Prepare confidently for your licensing test!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What tax treatment applies to earnings from a non-qualified annuity when withdrawn?

Tax-free
Subject to capital gains tax
Taxable as ordinary income
Taxed at a reduced rate

The correct answer is: Taxable as ordinary income

Earnings from a non-qualified annuity are taxable as ordinary income when withdrawn. This means that any gains you accumulate in the annuity are subject to taxation as part of your income for the year in which you take the distribution. Non-qualified annuities are funded with after-tax dollars, meaning the initial investment isn't taxed upon withdrawal, but any earnings made on that investment are considered taxable income. The IRS uses the "last in, first out" (LIFO) method for withdrawals from non-qualified annuities, which highlights that the earnings are deemed to come out first and thus are taxed as ordinary income. Understanding this treatment is essential since it impacts the financial planning for individuals considering a non-qualified annuity for retirement savings or other investment goals. It's important to consider the tax implications when planning withdrawals to avoid unexpected tax liabilities.