Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 four years ago. The annuity has grown to value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS?
Your answer, 3000., was incorrect. The correct answer was: 4000.
Since this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59-½ when making the withdrawal, he also pays a 10% penalty, or $1,000. This makes a total of $4,000 tax and penalty paid on the random withdrawal.
Reference: 12.3.3 in the License Exam Manual.