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

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A non-qualified annuity contract is typically funded with what type of tax funds?

Pre-tax funds
After-tax funds
Tax-exempt funds
Deferred tax funds

The correct answer is: After-tax funds

A non-qualified annuity contract is typically funded with after-tax funds. This means that the money used to purchase the annuity has already been subject to income tax when it was earned. As a result, the contributions are made with money that has already been taxed, allowing for tax-deferred growth of the investment within the annuity. When withdrawals are made from the non-qualified annuity, the portion representing earnings will be taxed as ordinary income, while the contributions (the after-tax funds) will not be taxed again. This tax treatment highlights the benefit of using after-tax funds for a non-qualified annuity, as it enables the investor to potentially defer taxation on earnings until they are withdrawn, without the initial contributions being taxed again when taken out. In the context of the other options, while pre-tax funds are used in qualified retirement accounts like 401(k) plans, tax-exempt funds refer to accounts or investments where the earnings are never taxed, such as Roth IRAs, and deferred tax funds are not a standard term used concerning annuities. Therefore, after-tax funds is the accurate categorization for the funding of a non-qualified annuity.