PSI Ohio Insurance Practice Exam

What is the tax advantage of a non-qualified annuity?

1. Growth is tax deferred.

2. Contributions are tax-deductible.

3. Withdrawals are tax-free.

4. Capital gains are taxed at a lower rate.

The correct answer is: Growth is tax deferred.

The tax advantage of a non-qualified annuity lies in the ability for the investment to grow tax-deferred. This means that any earnings generated by the annuity, such as interest, dividends, or capital gains, are not subject to income tax until they are withdrawn. This deferral of taxes allows the investment to potentially accumulate at a faster rate, as the investor can reinvest the funds that would otherwise have gone toward taxes. Non-qualified annuities are typically funded with after-tax dollars, meaning that contributions are not tax-deductible. This distinguishes them from certain qualified accounts where contributions can reduce taxable income. Additionally, withdrawals from a non-qualified annuity are subject to taxation on the earnings, not being tax-free. Lastly, while capital gains in other investments may benefit from lower tax rates, that concept does not apply similarly within the structure of non-qualified annuities, where taxation is based on ordinary income rather than capital gains rates. Overall, the primary benefit of a non-qualified annuity is indeed that the growth is tax-deferred until the money is accessed.