Alec, who uses the Simplified Method for his annuity, will recover his cost tax-free after how many months?

The correct answer indicates that Alec can recover his cost tax-free after 120 months when using the Simplified Method for his annuity. The Simplified Method allows individuals to recover their investment in the annuity (the cost basis) on a tax-free basis over a specific number of months, typically based on the amount of the annuity and the expected return.

For annuities, the recovery period is essential for determining how much of each annuity payment is considered a return of the investment and how much is taxable income. In this particular case, the 120-month period aligns with the calculation used under the Simplified Method, which is often derived from specific IRS guidelines that help individuals easily handle the tax implications of their annuities.

Understanding that the tax-free recovery period is set at 120 months is crucial for taxpayers to effectively plan their finances and ensure compliance with tax regulations. The concept of tax-free recovery plays an important role in managing the tax liability associated with annuities, allowing for better cash flow and investment planning.