Answer: $20,000 of the distribution is taxable and $5,000 is not taxable
Explanation:
The options to the question are:
A. The entire $25,000 distribution is not taxable
B. $5,000 of the distribution is taxable and $20,000 is not taxable
C. $20,000 of the distribution is taxable and $5,000 is not taxable
D. The entire $25,000 distribution is taxable.
From the question, we are told that a customer contributed $50,000 to a variable annuity contract and that the account value has grown over the years and the NAV is now $70,000.
We are further told that the customer is now age 60, and takes a lump-sum distribution of $25,000 to pay for expenses. This indicates that there will be tax deductible in the amount of :
= $70000 - $50000 = $20,000. It should also be noted that $5000 won't be taxed.
