Cost basis represents the amount of after-tax money the owner has invested in the contract.
Non-qualified annuity definition.
A non-qualified annuity is purchased with after-tax dollars, not through a qualified retirement plan.
How cost basis is calculated.
The cost basis equals the sum of all premiums paid, minus any non-taxable withdrawals previously received.
Why this matters for taxation.
When distributions occur:
Earnings are taxable as ordinary income.
The cost basis portion is returned tax-free.
Evaluate each option.
A. Opportunity cost
An economic concept, not a tax basis.
B. Total premiums paid
Correct. This is the owner’s investment in the contract.
C. Guaranteed cash value
A policy feature, not tax basis.
D. Actual cash value
Includes earnings, not just after-tax investment.
Conclusion.
The cost basis of a non-qualified annuity is the total premiums paid.
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