Friday, November 03, 2006

Question: When do you pay a 10% penalty for cashing in an annuity

I have a question:

I have a variable insurance policy that I will be rolling over via 1035 exchange into a low cost variable annuity at Vanguard. The cost basis of the variable insurance policy is $50k. The cash value of the policy is $35k.

If I sell / cash out the variable annuity in hypothetical 10 years (before I'm 59 1/2) when the cash value of the annuity equals the cost basis - both are at $50k - will I have to pay the IRS a 10% penalty for cashing the annuity in before reaching the age of 59 1/2?

I've heard some conflicting advice on this matter and am interested in what others have to say.

Have a great day,


Jeremy said...

I believe it depends on if your VA is qualified of non-qualified. If it is a qualified annuity (Traditional IRA, 401k, etc) where it is pre-tax dollars, then regardless of the cost basis the 10% penalty applies on the actual dollar amount withdrawn.

If it is a non-qualified annuity, meaning after-tax contributions, then the penalty applies to the gains.

makingourway said...

Thanks, Gen X.
It was non-qualified; i.e. a variable life policy.

Jawn Lam said...

No. You can start a 72t/q program. This will allow you to start taking distributions on your annuity with out having the IRS levy the 10% 59.5 age penalty. The caviat under this program is that you must maintain the distribution for the greater of 5 years of age 59.5.

If you have any other questions, please feel free to contact me at anytime. This is not a solicitation. I am an annuity wholesaler. I am not a retail broker, so I do would not directly make a commission off of your transaction. I just like to share the knowledge that I've been trained with.

Jawn Lam