Tax & EvaluationQuestion 102 of 110
A variable annuity purchased inside a Traditional IRA with fully deductible contributions is distributed at age 65. The distribution is:
a.Fully taxable as ordinary income, because there is no after-tax cost basis
b.Taxable only on the earnings portion
c.Entirely tax free because annuities are tax favored
d.Taxed at long-term capital gains rates
Explanation
When every dollar went in pre-tax, the contract has no basis, so the entire distribution is ordinary income. An exclusion ratio applies only to non-qualified contracts funded with after-tax money. The tax-deferred wrapper never converts ordinary income into capital gains.
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