Fixed Immediate Annuity Age 50

Submitted by Peter Thomann on Mon, 2018-01-08 11:00

Does a 50 year old individual avoid the 10% early withdrawal penalty by purchasing an immediate fixed annuity with a retirement plan at age 50? If yes, would the individual be required to use the entire retirement plan balance? For example, the individual has a $500,000 401(k) account balance and would like to use $300,000 of the balance for the immediate fixed annuity.
Thank you.



Submitted by Alan - IRA critic on Mon, 2018-01-08 17:02

  • If this is an annuity purchased by the plan and is still qualified  money when distributions are paid, unless the person qualifies as a public safety employee, the penalty would apply up to age 59.5. Sec 72t applies and the “Substantially equal periodic payment exception” is limited to payments calculated using one of the 3 methods described in RR 2002-62. While the annuity payments in this case will be equal, the amount of those payments will not be determined using one of those 3 methods. 
  • That said, the govt wishes to encourage annuity option expansion with 401k plans to replicate what has been available in the past from disappearing DB pensions. Those DB pensions were also subject to penalty if separation occurred prior to age 55, and that is why severance packages often rolled out severance payments to 55 for retirements prior to that year. Perhaps the industry has devised a way to avoid the penalty, so I would check with the plan administrator and ask how the 1099R will be coded, but expect a Code 1.
  • If a 401k participant uses a partial balance for the annuity, that partial amount would not be treated differently because it was less than the total plan balance. 

Submitted by Peter Thomann on Tue, 2018-01-09 01:48

Thank you Alan.  It appears the money used for the fixed annuity leaves the plan via a rollover.  The annuity is not purchased by the plan.  If the annuity is not purchased by the governmental plan and the funds leave the plan, would the public safety officer exception not apply?  The vendor used is a company called Hueler Companies Income Solutions Annuity Platform. Another question: If a governmental 457(b) participant were to rollover to purchase the immediate fixed annuity, the no 10% early withdrawal penalty of the 457(b) would be lost?

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