Question

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
b. $13,000
c. $25,000
d. $38,000

Answer 1

b.$13,000

Step-by-step explanation:

The investment is made using post-tax funds. Therefore, only the earnings made on the investment ($38,000-$25,000=$13,000) is subject to taxation. IRS applies the exclusion ratio to determine what portion of a non-qualified annuity withdrawal is taxable.