Which statement is true about qualified and nonqualified annuities?

Which statement is true about qualified and nonqualified annuities?

• A. Nonqualified annuities are purchased with pre-tax dollars.
• B. Qualified annuities may or may not have a cost basis.
• C. The FIFO tax rule applies to nonqualified annuities.
• D. Premature distributions from qualified annuities are not penalized.

Answer: (B)

Qualified annuities are those that are funded with pre-tax dollars, typically through qualified retirement plans like IRAs or 401(k)s. When you contribute to a qualified annuity, you typically do not pay taxes on the contributions or the earnings until you withdraw funds in retirement. This structure means that there will often be a cost basis associated with these annuities since the contributions to these accounts may have been made with pretax money, and the earnings are tax-deferred. The statement about qualified annuities may or may not having a cost basis emphasizes that while the contributions may generally have a pretax impact, any amounts that you roll over or transfer may create a complex situation regarding the cost basis. Thus, this statement is true, as there can be instances depending on the source of the funds that impact the cost basis of a qualified annuity. The other statements do not correctly represent the characteristics of qualified and nonqualified annuities. For example, nonqualified annuities are purchased with after-tax dollars, and the FIFO tax rule, which describes how withdrawals are taxed, applies to nonqualified annuities rather than qualified ones. Additionally, premature distributions from qualified annuities usually incur a penalty unless exceptions apply, contrary to the

Qualified annuities are those that are funded with pre-tax dollars, typically through qualified retirement plans like IRAs or 401(k)s. When you contribute to a qualified annuity, you typically do not pay taxes on the contributions or the earnings until you withdraw funds in retirement. This structure means that there will often be a cost basis associated with these annuities since the contributions to these accounts may have been made with pretax money, and the earnings are tax-deferred.

The statement about qualified annuities may or may not having a cost basis emphasizes that while the contributions may generally have a pretax impact, any amounts that you roll over or transfer may create a complex situation regarding the cost basis. Thus, this statement is true, as there can be instances depending on the source of the funds that impact the cost basis of a qualified annuity.

The other statements do not correctly represent the characteristics of qualified and nonqualified annuities. For example, nonqualified annuities are purchased with after-tax dollars, and the FIFO tax rule, which describes how withdrawals are taxed, applies to nonqualified annuities rather than qualified ones. Additionally, premature distributions from qualified annuities usually incur a penalty unless exceptions apply, contrary to the