Washington Life Producer Practice Exam

How are annuities treated favorably in terms of taxes?

1. Gains are taxed at distribution

2. They are tax-free until death

3. Premiums are tax-deductible

4. They have a fixed tax rate

The correct answer is: Gains are taxed at distribution

Annuities are structured to provide tax-deferred growth, meaning that the investment earnings within the annuity are not taxed until they are withdrawn. This characteristic allows the annuity owner to accumulate funds without the burden of annual tax payments. The correct choice highlights that gains from an annuity are taxed at distribution—it emphasizes that taxes are applied only when the funds are accessed, usually during retirement when individuals may be in a lower tax bracket. This can lead to a favorable tax treatment compared to other investment options where gains might be taxed annually. The other options do not accurately represent how annuities are treated for tax purposes. For instance, the suggestion that they are tax-free until death is misleading, as taxes apply when distributions occur, not merely at the time of the owner's death. The idea that premiums are tax-deductible is also inaccurate, since contributions to non-qualified annuities are made with after-tax dollars. Finally, the notion of a fixed tax rate is not applicable because the tax rate on distributions can vary based on the individual's overall income and tax situation during withdrawal.