Tax & EvaluationQuestion 101 of 110
Withdrawals of earnings from a non-qualified annuity before annuitization are taxed:
a.As long-term capital gains
b.On a first-in, first-out basis, so principal comes out first
c.Only when the contract is fully surrendered
d.As ordinary income on a last-in, first-out basis, so earnings come out first
Explanation
Non-qualified annuities use LIFO ordering, meaning the taxable earnings are deemed withdrawn before the after-tax principal, and they are taxed at ordinary rates. Annuity gains never receive capital gains treatment because the growth was tax deferred, not invested in a taxable capital asset. Partial withdrawals are taxable when taken, not only at full surrender.
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