A supplemental annuity plan is a tax-deferred annuity bought through financial advisers licensed for state life insurance sales. The deferred annuity doesn’t reduce annual income based on contributions; there is no contribution limit. Earnings grow without tax consequence until taken out. The withdrawal of an annuity is also referred to as a distribution or surrender.
IRS Regulations
The IRS regulates the taxation of deferred annuities. Normal distributions from these financial products follow the same guidelines as Individual Retirement Accounts, 401k or 403b plans. You must reach age 59 1/2 for normal distribution eligibility. Unlike other retirement savings plans, the distributions from a deferred annuity only add the earnings to income when filing taxes. Early distributions. those taken prior to age 59 1/2, are taxed and assessed a 10-percent penalty.
A Surrender
Surrendering the annuity means taking all the money out of the deferred product. All annuities have a surrender period, the contract time frame you must keep assets in the annuity, otherwise you pay penalties to the insurance company for early withdrawal. The surrender period might last anywhere from one to 15 years. The charges are a percentage of the money taken out, usually starting at a higher percentage and reducing each anniversary date. For example, a 7-year annuity might have a surrender charge schedule looking like this: 7 percent, 6 percent, 5 percent, 4, percent, 3 percent, 2 percent and 1 percent. After the seventh year, there is no penalty assessed by the insurance company.
A Free Look
When buying deferred annuities, you can take a look at the contract before you commit without any penalty. This is known as the free look period. Depending on state regulations, most free look periods range from 10 to 14 days. The reason a free look period exists is to give you the time to look at all the fine print. Many details might be overlooked in the sales process; whether intentionally or inadvertently. The free look period is your way of looking at every clause, contingency and cost associated with your contract. If you don’t like what you see, surrender the contract and get all your money back.
Accounting Considerations
The IRS maintains accounting rules of withdrawals for supplemental annuities. The last money going into the annuity, the earnings, is considered the first money taken out. The earnings are added to taxes which is recorded first by the annuity company who generates a 1099-R for any distribution; the taxable portion is noted in box 2. Use this information when filing personal tax returns.
This entry was posted
on Sunday, February 27th, 2011 at 5:50 am and is filed under Home Insurance.
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