72t questions
I have a client that wishes to roll out of an indexed annuity that he holds at another firm, which is yielding a very low interest rate into another investment; my client is still in the surrender charge schedule and is 56 years of age. My question is can he covert the fixed annuity into a five year SIPA? I thought the SIPA is an exception to the 72t, meaning that he would not be able to use the 72t loophole, for lack of better words, without being subjected to the 10% early withdrawal penalty . Can someone please give me an answer to this question?
Permalink Submitted by Alan Spross on Mon, 2011-07-18 22:15
An SPIA with a period less than life expectancy would not provide exemption from the early withdrawal penalty.
A 72t plan (aka SEPP) can be set up with an IRA annuity or with a non qualified annuity, where the plan is technically a 72q plan. Either way the distribution calculations are based on life expectancy, which limits the amount per year that can be distributed without penalty to around 5% of the original amount balance as a maximum. A 5 year SPIA is obviously going to return the entire balance plus a small amount of interest within just that 5 year limited period.
Therefore, if he annuitized the contract for 5 years, the distributions he receives prior to age 59.5 would incur the 10% penalty, at least the taxable portion of those distributions. A non qualified annuity may have a considerable amount of investment cost basis included which would not be taxed or penalized.
Permalink Submitted by Eric Woodfill on Tue, 2011-07-19 00:03
That is what I thought, thanks for the confirmation.