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

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Is switching between annuity sub-accounts a taxable event?

Yes
No
Only if the account balance changes
Depends on the issuer's policy

The correct answer is: No

Switching between annuity sub-accounts is considered a non-taxable event. This is because transactions within the same annuity contract, such as reallocating funds among different sub-accounts, do not trigger immediate taxation. The IRS treats these movements as part of the same investment vehicle, allowing the growth to continue on a tax-deferred basis until the funds are withdrawn or the contract is surrendered. By reallocating investments among sub-accounts, the investor does not realize any gain or loss at that moment, meaning there is no taxable event occurring. This allows individuals to adjust their investment strategy without incurring taxes until they eventually take distributions from the annuity itself. Understanding this principle is crucial for investors looking to optimize their financial strategy while managing tax implications effectively.