Early Withdrawal Penalty Exceptions

Early Withdrawal Penalty Exceptions

Annuities can be a significant investment for estate planning and retirement savings, but they are usually passed over because of the long-term contracts and expenses associated with this type of investment. Hefty penalties are assessed if you withdraw from your annuity before the contract stipulates. In addition, tax penalties may be imposed when you withdraw funds from an annuity. The amount of the penalty depends on the reasons for making the withdrawal, how long the investment has been held, and the investor’s age at the time of withdrawal.

What are the possible financial penalties? 

Withdrawing cash from your annuity early can lead to fines, taxes, and penalties. So, try to take these penalties into account before making the decision to withdraw your fund. If your annuity is part of a retirement account, you will have to pay an early withdrawal fee of ten percent to the federal government if you withdraw your money before you are 59.5 years old.

Also, if you withdraw your money within the first 5 to 8 years of buying the annuity, you’ll probably have a pay a surrender fee to your insurance company. In addition to the surrender fees and early withdrawal fees, you will likely have to pay income taxes.

Surrender charges

Most of the annuities allow you to withdraw either 5-10 percent per year or interest earnings without a penalty. Beyond that, most of the annuities have a surrender charge; this is a fine for making an early withdrawal. The annuity contracts are issued by insurance companies for a particular investment term, usually from 4-7 years. The penalty for early withdrawal changes for each year the investment is held; the longer the annuity is held, the lower the penalty get.

Tax penalties

In addition to penalties imposed by the insurance company, IRS may also impose a penalty on early withdrawals. Regardless of whether the annuity contract is held in an IRA, the IRS considered annuities as a retirement product. Non-qualified annuities also require the investor to reach the age of 59.5 before they can take penalty-free allotments. Also, early withdrawals are considered taxable income, and they may be charged states and federal taxes.

What are the early withdrawals penalty exceptions? 

Luckily, there is an early withdrawals penalty exception for an annuitant that has become disabled. Plus, some contracts provide a benefit for taking penalty-free withdrawals when the investor wants to pay for long-term care expenses. Also, several agreements allow the owner to withdraw about 10 percent of the contract value annually, as stated in the contract, penalty-free.

The bottom line 

When you want to sell an annuity, you need to be aware of the different laws that apply. Sometimes, it can become complicated to sell your annuity, since you may face some legal challenges.

Before agreeing to sell your annuity, you should take professional guidance. They will help you navigate through the complicated contracts you might have to sign. They will also help you understand your position and help you get the best possible deal from companies that buy annuities.

Early Withdrawal Penalty Exceptions
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