Final answer:
Qualified annuities are retirement investments with specific tax implications. They must be funded with pre-tax dollars from retirement accounts and are fully taxable upon distribution. They also must comply with RMDs and may incur a 10% early withdrawal penalty if taken before age 59.5 without a qualifying exception.
option a is the correct
Step-by-step explanation:
When considering qualified annuities, it's important to understand their characteristics and tax implications. Qualified annuities are a type of retirement investment that can offer tax advantages:
- a. They can be purchased with funds from life insurance proceeds or IRA assets. This statement is inaccurate; qualified annuities are funded with pre-tax dollars, typically from an individual's retirement plan such as a 401(k) or an IRA. Using life insurance proceeds to fund an annuity would be a different type of product, often referred to as a non-qualified annuity.
- b. The payments generally have a 50% exclusion ratio. This statement is also inaccurate; the exclusion ratio for non-qualified annuities refers to the portion of each payment that is excluded from taxable income, representing a return of the after-tax investment in the annuity. For qualified annuities, since the contributions are made pre-tax, the distributions are generally fully taxable.
- c. The payments avoid the 10% early withdrawal penalty. This can be true if distributions are made due to reaching the age of 59.5, death, or disability. However, prior to age 59.5, unless an exception applies, early withdrawals may be subject to a 10% penalty.
- d. They must comply with the minimum distribution rules. This is correct. Qualified annuities are subject to Required Minimum Distributions (RMDs), which must begin by April 1 following the year in which the owner reaches age 72 (as per current IRS rules).
It is essential to understand the tax-deferment benefits offered by 401(k)s and Traditional IRAs, where funds grow tax-deferred and are typically taxed upon withdrawal. This tax-deferred growth allows the invested funds to potentially accumulate at a faster rate than if they were taxed annually.