Arizona Life and Health Practice Exam

When is interest income for a flexible premium deferred annuity reported for federal income taxes?

1. When contributions are made to the annuity

2. Upon receiving distributions from the contract

3. At the end of the tax year

4. Only when the annuity matures

The correct answer is: Upon receiving distributions from the contract

Interest income for a flexible premium deferred annuity is reported for federal income taxes upon receiving distributions from the contract. This means that the earnings grow tax-deferred until the contract owner begins to take withdrawals or distributions. At that point, any interest or investment earnings distributed will be subject to federal income tax. The tax treatment is designed to encourage long-term savings, allowing the investment to grow without immediate taxation on the earnings. It is important for annuitants to understand that while they do not pay taxes on the interest as it accrues in the annuity, it becomes taxable when they withdraw funds from the contract. This can significantly impact tax planning for individuals utilizing deferred annuities for retirement savings or income.