West Virginia State Life Insurance Practice Exam

What must be true for an annuity to be considered qualified?

1. It must provide a guaranteed minimum return

2. It must be funded through pre-tax contributions

3. It must be sold by a licensed agent

4. It must only pay out after the owner reaches age 65

The correct answer is: It must be funded through pre-tax contributions

For an annuity to be considered qualified, it must be funded through pre-tax contributions. This characteristic is crucial because qualified annuities are designed to receive funds that have not yet been taxed. When contributions are made pre-tax, they can be deducted from taxable income, allowing for tax-deferred growth until distributions are taken during retirement, at which point the withdrawals are taxed as ordinary income. This type of funding facilitates significant tax advantages, which is the key reason why an annuity qualifies under retirement plans like 401(k)s or IRAs. The ability to contribute without immediately incurring tax liabilities encourages savings for retirement. The other aspects of annuities, such as guaranteed returns or age stipulations for payouts, do not directly determine whether an annuity is classified as qualified. While selling through a licensed agent is important for regulatory compliance and protecting consumers, it is not a criteria that affects the tax status of the annuity itself.