Annuitization

Submitted by John Cooney on Mon, 2019-09-30 20:55

I have a client, in his early 40s, whose company is ending their Cash Balance Plan, which is all pre-tax. One of the options available to him is to start an immediate annuity. My question is if he chooses the annuity and it starts before he is 59 1/2, is he subject to the 10% early withdrawal penalty? I have the company docs and it mentions the 10% penalty if he chooses a lump sum and does not roll it into an IRA, but does not mention any tax penalties associated with the annuity option. Thanks.



Submitted by Alan - IRA critic on Tue, 2019-10-01 00:46

  • This is a qualified plan and subject to Sec 72t. If he separated from the sponsoring employer in the year he reaches 55 or later, annuity payouts would receive the age 55 penalty exception. But no chance of that for several more years.  Otherwise, the penalty will apply until 59.5 unless another penalty waiver applies such as disability. The substantially equal payments exception does not apply here because the annual total distributions will not be determined by one of the 3 methods outlined in Rev Ruling 2002-62. It will probably be determined using years of service and final average salary. 
  • While he could roll the balance over to an IRA and start a 72t plan from the IRA to avoid the penalty, 15+ years is a long term for such a plan, and the plan would probably not match up to his needs for nearly that long. 
  •  Best bet is to roll it over and plan not to tap it until retirement, unless there are other options offered which could be of benefit.

Submitted by John Cooney on Tue, 2019-10-01 14:18

Thanks!

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