Matthew Brady, age 47, purchased a deferred annuity in January 1982 for $50,000. In the current year, when the surrender value was $125,000, Matthew took a nonperiodic distribution of $75,000. Which one of the following statements correctly describes the income tax consequences of the distribution?
1) $50,000 is tax free, $25,000 is taxable.
2) $75,000 is taxable income.
3) $50,000 is taxable, $25,000 is tax free.
4) $75,000 is tax free.