If an annuity is held within an IRA, does the 10% early withdrawal penalty still apply?

Submitted by Robert Pros on Fri, 2020-11-06 18:39

If a variable annuity is held within an IRA, does the 10% early withdrawal penalty still apply?

For example, someone under 59 1/2 has an annuity within in an IRA and decides to cash out of the annuity. Is that personal still subject to the 10 % early withdrawal penalty or does that fact that it is inside an IRA override that?



Submitted by Alan - IRA critic on Fri, 2020-11-06 19:08

  • If the cash out results in a distribution to the IRA owner, and not just a direct transfer of the annuity money to another IRA account, the penalty will apply, just as for any early IRA distribution. There are of course other possible penalty exceptions in addition to reaching 59.5.
  • Of course, the annuity itself may levy surrender charges according to the contract, but that is a totally different form of penalty.

Submitted by Robert Pros on Fri, 2020-11-06 19:24

Thank you so much.In this case I believe the person received a check from the IRA made payble to them personally.  Then then cashed it and put the money into another IRA.  So in this case it’s not a direct transfer or “trustee to trustee” transfer.  So they get hit with the penalty even though it is going into another IRA?I have searched high and low in my tax research software and can’t find chapter / verse on this.

Submitted by Alan - IRA critic on Fri, 2020-11-06 19:46

The 60 day rollover will eliminate the penalty, but more importantly the ordinary tax due on the distribution. Having used the one 60 day rollover allowed in 12 months, the person cannot move money between IRAs of the same type for the next 12 months without doing it as a direct transfer.

Submitted by Robert Pros on Tue, 2020-11-10 21:21

What you are saying makes total sense but I can’t find anything that speaks to it in the Code.

Submitted by Alan - IRA critic on Tue, 2020-11-10 22:07

  • The penalty is levied by Sec 72t of the tax code. Below I have copied the opening provision of that section. Note that the penalty only applies to the amount included in gross income from the distribution. Due to the rollover, no part of the distribution is included in income. The rollover is reported on line 4 of your Form 1040.
  • “(t)10-percent additional tax on early distributions from qualified retirement plans(1)Imposition of additional tax  If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.”

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