Question

• 32. Paul invested $25,000 in a nonqualified deferred annuity at the age of 47. Five years later, the contract has grown to $38,000, and Paul surrenders his contract for its full value. The early withdrawal tax penalty is assessed on how much of Paul's surrender?

a. $0 o b. $13,000 o c. $25,000 d. $38,000

Answer 1

b) 13000

For the non qualified deferred annuity contracts, interest and earnings are considered withdrawn first for federal income tax purposes.

Here,

Surrender value = 38000

Principal amount = 25000

38000 - 25000 = 13000 is taxed ( 10% federal tax penalty )

Remaining 25000 (principal amount) can be withdrawn without tax.