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

In a Non-Qualified Annuity, how is the payout taxed?

1. Fully taxable at the federal, state, and local level

2. Taxed only at the federal level

3. Taxed only at the state level

4. Tax-free

The correct answer is: Fully taxable at the federal, state, and local level

In the case of a Non-Qualified Annuity, the payout is fully taxable at the federal, state, and local levels because the contributions made to the annuity have already been taxed as income when they were initially earned. However, the growth of the investment, including any gains earned in the annuity, is tax-deferred until the money is withdrawn. When payouts are made, they are regarded as ordinary income, meaning that the entirety of the earnings portion of each distribution is subject to income tax. In addition, depending on the state and local regulations, the payout may also be subjected to state and local income taxes. This means that the answer accurately reflects the tax implications associated with a Non-Qualified Annuity, portraying a comprehensive understanding of how these financial products are treated from a taxation standpoint at various government levels. Understanding this is crucial for individuals considering the financial obligations associated with annuity distributions.