Final answer:
When an annuitant elects to take a cash surrender of a Deferred Annuity during the accumulation period, there are tax implications to consider. The earnings from the annuity are subject to ordinary income tax rates, while the original investment may not be subject to tax.
Step-by-step explanation:
When an annuitant, at age 56, elects to take a cash surrender of a Deferred Annuity during the accumulation period, there are tax implications to consider. The amount of taxes owed will depend on the annuity's earnings and the annuitant's tax bracket. The earnings from the annuity will be subject to ordinary income tax rates, while the original investment (basis) may not be subject to tax.
For example, let's say the annuitant invested $50,000 in the annuity and the current cash surrender value is $80,000. The $30,000 difference between the investment and the cash surrender value represents the earnings. If the annuitant is in the 25% tax bracket, they would owe $7,500 in ordinary income taxes on the earnings. The original $50,000 investment would not be subject to tax.