Non qualified annuity taxiation exclusion % self funded

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Talked to insurance company and they said the proceeds from the non qualified variable anniuty is taxed on a "LAST IN/First out basis!" and not using the exclusion % with my $100,000 initial investment back in 2011.  I disagreed and asked them to show me where in the contract it states this and also where the IRS guidelines aslo show this. Was I right to ask them to show me this?

[dmertz · Accepted solution]

"they said the proceeds from the non qualified variable anniuty is taxed on a "LAST IN/First out basis!"

What you were told is wrong.  There is no LIFO treatment

For nonperiodic distributions, distributions come first from taxable gains.  Only after all taxable gains have been distributed is any of your nontaxable investment in the contract distributed.  (26 U.S. Code § 72(e))

For periodic distributions after annuitizing, the nontaxable amount is in the same proportion as the investment in the contract is to the expected return.  (26 U.S. Code § 72(b))

Also see IRS Pub 575:  https://www.irs.gov/pub/irs-pdf/p575.pdf