Further help understanding variable annuities

I came accross this Q. Not sure I catch the concept behind these…Variable Annuity

1 Like

Hi @Terrence_Boyer, thanks for reaching out!

I’m happy to clarify - what part of the explanation could use more context?

Qualified variable annuities typically are created by rolling pre-tax funds from a qualified plan (e.g. 401k, 403b) into the annuity. Once the funds are transferred, investments are made in the separate account. Any capital gains or dividends received are automatically reinvested and the assets grow on a tax-deferred basis.

When a distribution is requested, the entire withdrawal is subject to ordinary income taxes. There is no differentiation between basis and growth as the funds used to create the qualified annuity were pre-tax already. Therefore, the entire $90,000 distribution in this question is subject to ordinary income taxes. There is no early withdrawal penalty assessed as the investor is 62 (47 + 15) years old when the distribution occurs.

Keep in mind the difference in tax consequences at distribution when comparing a qualified annuity to one that is non-qualified. An investor only pays taxes on the growth with a non-qualified annuity.

Thanks Justin. I will do a thorough read on qualified vs non qualified. Appreciate the help!

1 Like