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SIE practice questionhardVariable Annuities

Which of the following statements regarding tax treatment of variable annuity earnings is correct?

  1. AWithdrawals are always tax-free.
  2. BEarnings are taxed annually regardless of withdrawal.
  3. CEarnings are tax-deferred until withdrawal.✓ Correct answer
  4. DEarnings are subject to capital gains treatment at distribution.
Explanation

Why C — Earnings are tax-deferred until withdrawal.

Earnings tax are deferred until withdrawn, at which point they are taxed as ordinary income, not capital gains. They are not taxed annually nor always tax-free.

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