C.22 Qualified and Non-Qualified Annuities

Question 1

Which of the following statements is true about qualified annuities?

A. Contributions are made with pre-tax dollars
B. Withdrawals are tax-free
C. They are not subject to contribution limits
D. They can be purchased by anyone

Answer 1

A. Contributions are made with pre-tax dollars

C.22 Qualified and Non-Qualified Annuities

Question 2

Which of the following is a potential advantage of a non-qualified annuity?

A. Withdrawals are always tax-free
B. Contributions are tax-deductible
C. They have no contribution limits
D. They are not subject to required minimum distributions (RMDs)

Answer 2

C. They have no contribution limits

C.22 Qualified and Non-Qualified Annuities

Question 3

Which of the following is a potential disadvantage of a qualified annuity?

A. Withdrawals are always tax-free
B. Contributions are not tax-deductible
C. They have contribution limits
D. They are not subject to required minimum distributions (RMDs)

Answer 3

C. They have contribution limits

C.22 Qualified and Non-Qualified Annuities

Question 4

John is considering purchasing an annuity with a lump-sum payment. Which of the following types of annuities is he most likely considering?

A. Immediate annuity
B. Deferred annuity
C. Fixed annuity
D. Variable annuity

Answer 4

A. Immediate annuity

C.22 Qualified and Non-Qualified Annuities

Question 5

Which of the following statements is true about a deferred annuity?

A. Payments to the annuitant begin immediately after the annuity is purchased
B. They typically have a fixed interest rate
C. They are not subject to surrender charges
D. They are always more expensive than other types of annuities

Answer 5

B. They typically have a fixed interest rate

C.22 Qualified and Non-Qualified Annuities

Question 6

Which of the following is a potential disadvantage of a variable annuity?

A. They typically have lower fees than other types of annuities
B. They do not provide any investment flexibility
C. They are not subject to market risk
D. They can be more complex than other types of annuities

Answer 6

D. They can be more complex than other types of annuities

C.22 Qualified and Non-Qualified Annuities

Question 7

Which of the following is a potential advantage of a fixed annuity?

A. They provide higher returns than other types of annuities
B. They do not have any surrender charges
C. They provide a guaranteed rate of return
D. They offer more investment flexibility than other types of annuities

Answer 7

C. They provide a guaranteed rate of return

C.22 Qualified and Non-Qualified Annuities

Question 8

Which of the following is a potential disadvantage of a non-qualified annuity?

A. Contributions are not tax-deductible
B. They have no contribution limits
C. They are not subject to required minimum distributions (RMDs)
D. Withdrawals are always tax-free

Answer 8

A. Contributions are not tax-deductible

C.22 Qualified and Non-Qualified Annuities

Question 9

Which of the following is a potential advantage of a qualified annuity?

A. They have no contribution limits
B. Contributions are tax-deductible
C. Withdrawals are always tax-free
D. They are not subject to surrender charges

Answer 9

B. Contributions are tax-deductible

C.22 Qualified and Non-Qualified Annuities

Question 10

Which of the following is a potential disadvantage of a fixed annuity?

A. They provide a guaranteed rate of return
B. They typically have higher fees than other types of annuities
C. They offer more investment flexibility than other types of annuities
D. They do not have any surrender charges

Answer 10

B. They typically have higher fees than other types of annuities

C.22 Qualified and Non-Qualified Annuities

Question 11

Which of the following is a potential disadvantage of a deferred annuity?

A. Payments to the annuitant begin immediately after the annuity is purchased
B. They typically have a variable interest rate
C. They are subject to surrender charges
D. They provide a guaranteed rate of return

Answer 11

C. They are subject to surrender charges

C.22 Qualified and Non-Qualified Annuities

Question 12

Which of the following is a potential advantage of a variable annuity?

A. They typically have lower fees than other types of annuities
B. They provide a guaranteed rate of return
C. They do not involve investing in securities
D. They provide investment flexibility

Answer 12

D. They provide investment flexibility

C.22 Qualified and Non-Qualified Annuities

Question 13

Which of the following is a potential disadvantage of a qualified annuity?

A. Contributions are not tax-deductible
B. Withdrawals are always tax-free
C. They are subject to required minimum distributions (RMDs)
D. They have no contribution limits

Answer 13

C. They are subject to required minimum distributions (RMDs)

C.22 Qualified and Non-Qualified Annuities

Question 14

Which of the following is a potential advantage of a non-qualified annuity?

A. Contributions are made with pre-tax dollars
B. They have no contribution limits
C. They are not subject to surrender charges
D. Withdrawals are always tax-free

Answer 14

B. They have no contribution limits

C.22 Qualified and Non-Qualified Annuities

Question 15

Margaret, at the age of 28, was bestowed with an inheritance of $50,000 from her grandfather. On her co-worker’s suggestion, who is a registered insurance broker, she invested in a deferred annuity. Now, at age 45, she seeks advice from a CFP® professional regarding her annuity options, and the CFP® professional is worried that the initial purchase of the annuity might have been unsuitable for her. What should be the primary step taken by the CFP® professional?

A. Report the co-worker to the state insurance oversight board.
B. Engage in a 1035 exchange for a fresh annuity contract.
C. Recommend Margaret to dissolve the contract as there are no more surrender fees.
D. Ascertain Margaret’s anticipated cash flow requirements.

Answer 15

D. Ascertain Margaret’s anticipated cash flow requirements.

The cornerstone of the CFP® process and best practices is to always begin with understanding the client’s financial goals, needs, and situation before making any recommendation or taking any action. Thus, before making decisions about the annuity, the CFP® professional should first ascertain Margaret’s anticipated cash flow needs to determine the most suitable course of action.

C.22 Qualified and Non-Qualified Annuities

Question 16

Maria has a non-qualified annuity that she has funded with post-tax dollars. She is considering making a withdrawal. Which of the following statements best describes how the withdrawal will be taxed?

A. The entire amount of the withdrawal will be tax-free.
B. Only the earnings portion of the withdrawal will be taxed as ordinary income.
C. The entire amount of the withdrawal will be taxed as ordinary income.
D. The principal portion of the withdrawal will be taxed as capital gains.

Answer 16

B. Only the earnings portion of the withdrawal will be taxed as ordinary income.

In non-qualified annuities, the principal (amount initially invested with post-tax dollars) is not taxed upon withdrawal. Only the earnings part is subject to taxation, and it is taxed as ordinary income.

C.22 Qualified and Non-Qualified Annuities

Question 17

Thomas is 60 years old and has decided to begin receiving periodic payments from his qualified annuity. Which of the following is true about the taxation of these payments?

A. The payments are fully taxable as ordinary income.
B. The payments are tax-free since they are made after age 59.5.
C. Only half of each payment is subject to tax.
D. Taxes on the payments are deferred until Thomas turns 70.5.

Answer 17

A. The payments are fully taxable as ordinary income.

Since the contributions to a qualified annuity are typically made with pre-tax dollars, the entire amount of the periodic payments received is taxable as ordinary income.

C.22 Qualified and Non-Qualified Annuities

Question 18

Linda purchased a non-qualified annuity ten years ago. She wants to exchange it for a different annuity contract with better terms. Which of the following best describes the tax implications of this exchange?

A. The exchange will trigger a taxable event, and Linda must pay taxes on the gains.
B. The exchange is a non-taxable event under Section 1035 of the Internal Revenue Code.
C. Only the basis of the annuity is transferred tax-free, gains are taxable.
D. The exchange is taxable, but at a reduced capital gains tax rate.

Answer 18

B. The exchange is a non-taxable event under Section 1035 of the Internal Revenue Code.

Section 1035 allows for the tax-free exchange of one annuity contract for another, which lets the annuity owner change terms or companies without incurring immediate taxation on the exchange.

C.22 Qualified and Non-Qualified Annuities

Question 19

John is the beneficiary of his wife’s qualified annuity after she passes away. What are his options regarding distributions, and how are they taxed?

A. He can take a lump-sum distribution, which is entirely tax-free.
B. He can continue receiving payments, which are taxed as capital gains.
C. He can either take a lump-sum distribution or continue the payments, both of which are taxable as ordinary income.
D. He can roll over the annuity into his IRA and defer taxes.

Answer 19

C. He can either take a lump-sum distribution or continue the payments, both of which are taxable as ordinary income.

Since the contributions were made with pre-tax dollars, any distributions from a qualified annuity, whether continued or taken as a lump-sum, are taxable as ordinary income.

C.22 Qualified and Non-Qualified Annuities

Question 20

Sarah is considering withdrawing from her non-qualified annuity before she turns 59.5 years old. What are the likely tax consequences?

A. Withdrawals will be subject to an early withdrawal penalty of 10% on the total amount.
B. Withdrawals will be subject only to ordinary income tax on the earnings portion.
C. Withdrawals will incur both ordinary income tax on the earnings and a 10% penalty on the earnings portion withdrawn early.
D. There is no penalty or additional taxes because the annuity is non-qualified.

Answer 20

C. Withdrawals will incur both ordinary income tax on the earnings and a 10% penalty on the earnings portion withdrawn early.

For non-qualified annuities, while the principal can be withdrawn tax-free, the earnings are subject to ordinary income tax. If the withdrawal occurs before age 59.5, there is also a 10% early withdrawal penalty, but it only applies to the taxable portion (the earnings).

C.22 Qualified and Non-Qualified Annuities