Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Enhance your competence for the Series 6 Exam. Study with expertly crafted multiple-choice questions, each complete with hints and detailed explanations. Elevate your performance and pass the exam with confidence.

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

How is the payout from a qualified annuity typically taxed?

Tax-free if under a certain limit
Taxed as ordinary income
Taxed at capital gains rate
Taxed only when principal is withdrawn

The correct answer is: Taxed as ordinary income

The payout from a qualified annuity is typically taxed as ordinary income because the contributions to the annuity are made with pre-tax dollars, which means that taxes are deferred until the money is actually withdrawn. When an investor receives distributions from a qualified annuity, the entire amount is considered taxable income in the year it is received, as the initial contributions to the annuity were not taxed at the time they were made. This standard taxation applies regardless of the financial purpose of the annuity — whether it's for retirement income or any other reason. This taxation treatment is a key characteristic of qualified retirement plans, including 401(k)s and traditional IRAs, which are designed to encourage retirement savings by allowing tax deferral until distributions are taken. Hence, it's important for investors to plan for the tax implications of withdrawals from qualified annuities when determining their overall retirement strategy.