General Securities Sales Supervisor (Series10) Practice Exam

Which characteristic is true regarding qualified annuities?

1. A They have contribution limits and are funded with pre-tax dollars

2. B They do not have contribution limits but are funded with pre-tax dollars

3. C They have contribution limits and are funded with after-tax dollars

4. D They do not have contribution limits and are funded with after-tax dollars

The correct answer is: A They have contribution limits and are funded with pre-tax dollars

Qualified annuities are investment vehicles that meet specific IRS requirements, allowing for tax advantages. One of the defining characteristics of qualified annuities is that they are typically funded with pre-tax dollars. This means that contributions to these annuities can be deducted from taxable income, lowering the individual’s tax burden for the year the contributions are made. Additionally, these annuities often have contribution limits, which are set by the IRS and can change annually, similar to other retirement accounts. Funding with pre-tax dollars leads to a tax-deferred growth of the investment until withdrawals begin, typically during retirement. At that point, withdrawals are taxed as ordinary income, reflecting the tax deferral provided during the accumulation phase. This characteristic aligns with the tax benefits granted to qualified retirement plans, making qualified annuities valuable components of a retirement strategy. The context of other options highlights that only pre-tax funding qualifies for the tax benefits associated with annuities, and contribution limits are essential for maintaining qualified status in accordance with IRS rules.