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Understand LIFO: Tax Implications on Annuity Withdrawals
When withdrawing from a non-qualified annuity, the taxation follows a Last In, First Out (LIFO) approach, meaning that any gains are taxed before the initial investment or cost basis. For example, if an individual has a non-qualified annuity with a $100,000 cost basis and $400,000 in gains, cashing out the entire annuity results in a taxable event of $400,000 in gains, leading to a significant tax liability. It's crucial to consider these tax implications when planning distributions from annuities, especially in situations where funds are needed for essential expenses, such as long-term care.