Final answer:
The correct answer is A. Annuities are indeed considered IRD assets, which are those that the decedent was entitled to but had not received at the time of their death.
Step-by-step explanation:
The correct answer to the student's question is A. Annuities are considered Income in Respect of a Decedent (IRD) assets. To elaborate, IRD assets are those that the decedent was entitled to but had not received at the time of death. Annuities, as a form of retirement or investment vehicle, often fall into this category because the accumulated interest or investment gains are not taxed until they are distributed.
Additionally, for clarification:
- B. Beneficiaries of nonqualified annuities must indeed follow specific minimum distribution rules set by the Internal Revenue Service.
- C. An exchange of a life insurance policy for an annuity can actually be a tax-free exchange under Section 1035, provided certain conditions are met.
- D. A loss on a variable annuity cannot typically be deducted if the annuity is exchanged for another annuity; instead, the loss is usually embedded in the new contract.
Retirement accounts like 401(k)s and Traditional IRAs offer tax-deferred growth, which means that taxes are not paid on the earnings until the funds are withdrawn. It is important for individuals planning for retirement to understand the tax implications of their investment choices.