Which is true about the taxation of benefit payments under a non-qualified annuity?

What a non-qualified annuity is.

A non-qualified annuity is purchased with after-tax dollars, not through a qualified retirement plan (such as an IRA or 401(k)).

Tax treatment of annuity distributions.

Distributions are taxed under the interest-first (LIFO) rule, meaning:

Earnings are taxed first as ordinary income.

Principal (cost basis) is returned tax-free only after earnings are exhausted.

Age-based penalty rule.

If distributions are taken before age 59½, the taxable portion may be subject to:

Ordinary income tax, and

An additional 10% federal penalty tax, unless an exception applies.

Evaluate each option.

A. Fully taxable at all times

Incorrect. Only the earnings portion is taxable.

B. Must begin by age 70½

Incorrect. Required minimum distributions apply to qualified plans, not non-qualified annuities.

C. Before age 59½ may be subject to a penalty

Correct.

D. After age 59½ tax exempt

Incorrect. Earnings are still taxable as ordinary income.

Maryland tax conformity.

Maryland follows federal tax treatment for annuity distributions.

Conclusion.

Early distributions from non-qualified annuities may be subject to a penalty, making option C correct.