8 Circumstances When Penalties on Premature Annuity Distributions Will Not be Invoked

Premature distributions (those made before certain dates listed below) are subject not only to the normal tax on ordinary income but also to a penalty tax of 10 percent. The 10 percent penalty applies only to the amount of the distribution that is included in income.

The penalty for premature distributions will not apply to any of the following:

  1. payments that are part of a series of substantially equal periodic payments made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his beneficiary (unless the series of payments is modified under certain circumstances);
  2. payments made on or after the time the contract owner reaches age 59½;
  3. payments made on account of the contract owner’s disability;
  4. payments made from qualified retirement plans and IRAs (but these are subject to other similar premature distribution requirements);
  5. payments made to a beneficiary (or annuitant’s estate) on or after the death of an annuitant;
  6. distributions under an immediate annuity contract;
  7. an annuity contract purchased on the termination of certain qualified employer retirement plans and held until the employee separates from service;
  8. payments allocable to investment in the contract before August 14, 1982.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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