Tax TreatmentQuestion 226 of 716
How is a non-annuitized withdrawal from a non-qualified deferred annuity issued after August 13, 1982 taxed?
a.Entirely as long-term capital gain taxed at preferential capital-gain rates
b.Entirely as a tax-free return of basis first, until the owner's basis is exhausted
c.Entirely as ordinary income until all gain is withdrawn, then as tax-free basis
d.Pro-rata between basis and gain, using the annuity exclusion ratio
Explanation
IRC §72(e)(2) applies LIFO treatment to post-1982 deferred annuity withdrawals: gain comes out first as ordinary income, and only after the gain is exhausted does the owner recover basis tax-free. Annuitized payments use the §72(b) exclusion ratio instead.
Law Reference: IRC §72(e)(2)This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
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