Wednesday, March 30, 2011

Annuity Withdrawals

Annuities are retirement investment vehicles owned and managed by insurance companies. While countless annuity products are available from multiple carriers, the rules regarding withdrawals from those accounts remain the same.

If you have retirement money invested in an annuity, understanding the rules and regulations regarding distribution of that money is essential.

Guaranteed Lifetime Income

The unifying characteristic of all annuities is the ability to guarantee yourself an income for life. Regardless of the type of annuity you own, every contract provides owners with the option of converting their account balance into a permanent stream of monthly payments.

However, in exchange for the steady and predictable monthly paycheck, you forfeit access to the lump-sum balance of your account.


Money that accumulates within an annuity remains untaxed until it is withdrawn. At the time of distribution, taxes are due on only the amount of money actually withdrawn. The aggregate sum of your annuity withdrawals is added to your total taxable income for the year.

Because annuities are retirement products, the taxes imposed on withdrawals are the same as your ordinary income tax rate, not at capital gains tax rates.

Surrender Charges

Most annuity contracts require you to leave your money in the account for a certain number of years. If you take a distribution from your annuity prior to the end of the surrender period, you may incur a surrender charge.

Surrender charges are penalties imposed as a result of withdrawals made within the first few years after you open the account. These fees typically range from 7 to 10 percent, and decrease incrementally every year until finally diminishing to nothing.

IRS Withdrawal Penalties

Separate and apart from surrender charges imposed by the annuity carrier for early withdrawals, additional penalties may be imposed by the IRS if your withdrawal occurs before you reach age 59 1/2. The IRS penalty for an early distribution from an annuity is 10% of the total amount withdrawn.

This article is a Twisted Nonsense Exclusive! (03/30/2011)

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