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How do I report an early annuity withdrawal?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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Reviewed byDaniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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How Do I Report An Early Annuity WithdrawalA premature annuity withdrawal must be reported for income tax purposes. The annuity company will issue a Form 1099-R to the annuitant in January of the year after the withdrawal was made.

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Once the 1099-R has been issued, the information on the form can be used to complete a detailed schedule that will help the annuitant calculate the taxes owed. The document is also used to record any exceptions to the early withdrawal penalty rule.

Annuity Basics

An annuity is a financial product that can be used to save money for retirement that is offered by insurance companies. The person who sets up the annuity (the annuitant) can deposit funds over a period of time or on a lump sum basis into the plan.

The money on deposit in the annuity grows on a tax-free basis. When the annuitant is ready to start withdrawing funds from the plan, this money can be paid out on a monthly, quarterly, semi-annually or annual basis. A minimum amount must be paid out per year once the annuity is in the distribution phase.

The amount of money that an annuitant will receive depends on how much money was deposited and how the annuity was set up.

Some of them only pay out funds for a set period, while others guarantee an income for the lifetime of the annuitant.

Early Withdrawal from an Annuity

An annuity is considered to be a long-term investment. The amount taken out of the annuity account is considered income and is subject to income taxes . In the case of an early withdrawal, which is one made before the annuitant turns 59 1/2 years of age, a penalty equal to 10% of the amount withdrawn must be paid.

I Report An Early Annuity WithdrawalThe insurance company may also charge administration or surrender fees to the annuitant if he or she wants to withdraw funds from the plan before reaching the age of 59 1/2.

How to Report the Early Withdrawal

The Form 1099-R will be issued by the insurance company early in the New Year following the withdrawal. If you don’t receive it by early February, contact the insurance company to request one.

The form you would use to record the amount of the withdrawal and calculate how much tax you should be paying on the amount you withdrew is called a Form 5329. It is available from the Internal Revenue Service (IRS) , and you can download a copy from its web site.

The taxable distribution amount from Form 1099-R is transferred onto Form 5329. The form will also have a space where any known exceptions can be recorded. Instructions will be provided to determine how an exception would affect any penalty owed by the annuitant. For example, a person who withdrew funds from an annuity to buy a home (as a first-time buyer) may be able to avoid having to pay the full amount of the penalty.

Once the amount of the withdrawal that is subject to a penalty has been determined, this figure is multiplied by 10% to calculate the amount payable. The penalty is listed on the annuitant’s personal tax return (Form 1040). The full taxable amount is listed on Line 15b of the form.

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Forms 5329 and 1040 must be signed before the taxpayer submits them to the IRS for processing.

The address of the IRS office that will be processing the form is included in the instructions for Form 1040.

Report An Early Annuity WithdrawalThe decision about whether to make an early withdrawal from an annuity is a very personal one. Not only are the funds that are withdrawn from the plan taxable, the annuitant is required to pay an additional 10% as a penalty to the IRS.

If an annuitant needs to access some cash, a better choice is to consider other sources of funding where the money is available without being subject to tax. It may make more sense to try to borrow the amount needed from another source rather than paying back IRS on early withdrawal of annuity. In a situation where the need for cash is not urgent and you are almost at the 59 1/2 years of age mark where you won’t need to pay the 10% penalty, you may want to consider waiting before you try to withdraw funds from the annuity.

The funds withdrawn from an annuity must be reported on your income tax return. The insurance company holding the annuity will send you a form detailing the amount of the withdrawal and any exceptions that apply. You would use this information to prepare your income tax return for the appropriate tax year. With just a ZIP code you can receive and compare annuity quotes now!

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