What is the penalty for withdrawing from an annuity?

Understanding the Penalty for Premature Annuity Withdrawals

An annuity is a long-term financial product designed to provide a steady stream of income throughout retirement. However, withdrawing funds from an annuity before a certain age can trigger a substantial penalty.

IRS 10% Penalty for Early Withdrawals

The Internal Revenue Service (IRS) imposes a 10% penalty on annuity withdrawals made before the age of 59½. This penalty is referred to as the 10% additional tax on early distributions from qualified retirement plans.

Applies to All Withdrawals

The 10% penalty applies to any withdrawal from an annuity, regardless of the reason. Whether you need the funds for an emergency, to cover unexpected expenses, or simply because you want the money, you will incur the penalty.

Exceptions to the Penalty

There are a few exceptions to the 10% penalty for early annuity withdrawals. These exceptions include:

• Death of the annuitant
• Disability
• Medical expenses exceeding 7.5% of your adjusted gross income (AGI)
• Substantially equal payments (SEPs) over your life expectancy
• Annuity contracts issued before January 1, 1985

Consulting a Financial Advisor

If you are considering withdrawing funds from an annuity, it is crucial to consult with a financial advisor. They can assess your individual circumstances and guide you on the best course of action. They can also help you explore alternative options that may not incur a penalty.

Conclusion

The IRS’s 10% penalty for early annuity withdrawals is a significant consideration before making any decisions. By understanding the penalty and its exceptions, you can make informed financial choices and avoid unnecessary tax consequences. Consulting with a financial advisor can provide invaluable assistance in navigating the complexities of annuity withdrawals.