Question

Ginger purchased a single-premium deferred annuity ten years ago at age 54 using $40,000 of after-tax funds she had accumulated over fifteen years. She decided to surrender the annuity this year for a lump-sum distribution of its $90,000 value. Which of the following statements is correct?

		Ginger will owe income taxes on $50,000.
		Ginger will owe income taxes on $90,000.
		Ginger will owe income taxes and a 10% penalty on $90,000.
		Ginger will owe income taxes and a 10% penalty on $50,000.

Answer 1

If an annuity is purchased with pre-tax dollars, payments from the annuity are fully taxable as income. If you buy an annuity with after-tax funds, you are required to pay taxes only on the earnings. One of the main tax advantages of annuities is they allow investments to grow tax-free until the funds are withdrawn.

In this case assesse has purchased with after tax fund so only $50,000 is taxable and 10% penalty is charged if it is withdrawn before the age of 591/2. Ginger purchased it 10n years ago when she was 54 so that means today when she has surrender she is 64. Therefore correct statement is Ginger will owe income taxes on $50,000.