An investor who is 48 years old is named the designated non-spouse beneficiary of a non-qualified variable annuity contract following the contract owner's death. The deceased owner had originally invested 175,000. If the beneficiary surrenders the contract for a lump-sum distribution of the full $175,000, which of the following statements accurately describes the federal tax implications of this distribution?
- The $55,000 growth portion is taxed as ordinary income, but the 10% IRS penalty for withdrawals before age 59½ does not apply.Cevap
- BThe $55,000 growth portion is taxed as ordinary income and is subject to an additional 10% IRS penalty because the beneficiary is under age 59½.
- CThe full $175,000 lump sum is received entirely income-tax-free by the beneficiary as an insurance death benefit.
- DThe $55,000 growth portion is taxed as a long-term capital gain, and no early withdrawal penalty applies.
Cevap
The $55,000 growth portion is taxed as ordinary income, but the 10% IRS penalty for withdrawals before age 59½ does not apply.
When a non-qualified variable annuity is surrendered following the owner's death, any growth above the original cost basis ( 120,000 = $55,000) is taxable to the beneficiary as ordinary income. Although distributions prior to age 59½ usually trigger a 10% IRS premature withdrawal penalty on earnings, distributions paid due to the death of the contract owner are explicitly exempt from this penalty.
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Taxation of non-qualified variable annuity death benefit distributions to beneficiaries