Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
The key federal income tax advantage of a nonqualified deferred annuity during the accumulation phase is that:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The defining tax benefit of a nonqualified deferred annuity is tax deferral: investment earnings accumulate within the contract without current income tax, and tax is paid only when money is distributed. This contrasts with taxable accounts, where interest and gains are taxed as they are earned. The deferral is valuable for long-term accumulation; it is why annuities are attractive retirement-funding vehicles.
Why the other options are wrong
- B) Nonqualified annuity premiums are paid with after-tax dollars and are not deductible; only qualified-plan contributions enjoy pre-tax treatment.
- C) Distributions above the cost basis are taxable as ordinary income; annuities do not provide tax-free distributions.
- D) Annual taxation of growth would describe a taxable investment account, not the deferred taxation of an annuity.
Memory hook
Deferral is the annuity's tax superpower: no current tax on growth, one bill at withdrawal.