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

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What is Ann's basis when she withdraws $22,000 from her non-qualified annuity?

$7,000
$15,000
$22,000
$30,000

The correct answer is: $15,000

In the context of non-qualified annuities, the basis consists of the total amount of contributions made by the investor, excluding any earnings or gains. When an investor withdraws funds from a non-qualified annuity, the IRS regulations stipulate that withdrawals are treated as coming first from the basis, then from the earnings, which helps to determine the taxability of the withdrawal. In this scenario, if Ann's basis is $15,000, this means that out of her total withdrawals, $15,000 represents her contributions (the amount she put into the annuity), and the remaining amount, if any, would be considered earnings. Since the withdrawal amount is $22,000, and Ann's basis is lower than the withdrawal, she is withdrawing more than her original investment, which could have taxable consequences for the earnings portion of the withdrawal. So, when Ann withdraws $22,000, her basis effectively recognizes the $15,000 she initially contributed to the annuity, allowing her to recover these contributions tax-free. The remaining amount would be considered taxable income to the extent it represents earnings. Understanding her basis is critical in evaluating any tax liabilities incurred during such withdrawals.