Question

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 four years ago, and it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal

Answer 1

Tax liability results from withdrawal = $2,800

Step-by-step explanation:

The customer has paid with after-tax money and consequently has a basis equal to the initial investment of 29k USD. Since the client only pay taxes on the growth portion of the withdraw itself
`(10k *0.28 = 2.8k )` .

If the customer has 58 years old, a penalty tax of 10% of the 10k is charged summing already with the 2.8k income tax.

If the customer has 59.5 years old it is not necessary to pay the 10% premature distribution penalty.