Non Qualified Annuity Annuitization

Submitted by Brian Kuhn on Wed, 2020-08-26 15:46

If non qualified annuity gets turned into a 20 year period certain payment, meaning not for life, and the person is under 59.5 at inception, would the part of each payment representing a gain incur a 10% penalty for only the years until they reach 59.5? Could that be avoided by instead annuitizing the contract for a lifetime payment?
Thanks



Submitted by Alan - IRA critic on Wed, 2020-08-26 16:47

  • There is no penalty on distributions made after 59.5 regardless of the plan. However, a busted SEPP under 72q will trigger retroactive penalties and interest for taxable distributions made prior to 59.5.  The 20 year period certain payout would not qualify for the SEPP exception to begin with, but a life or joint life with beneficiary would qualify, but only if the distributions are calculated using one of the 3 approved IRS methods described in Notice 2002-62.
  • Notwithstanding the above, NQ annuity immediate annuity distributions may qualify for a separate penalty exception under Sec 72(u)(4). The annuity owner should inquire whether such immediate annuities will be coded 2 in Box 7 showing the exception. If the insurance company issues Code 2, that would be more convincing to the IRS compared to the annuity owner filing Form 5329 to claim the exception using Dump code 12.  This exception is problematic since the IRS has never issued the Regs regarding this that they indicated would be issued.

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