I have written many articles regarding the benefits of annuities however you should know about the potential penalties associated with annuities and they can affect your contract.
IRS Penalties
Every single type of annuity is subject to IRS penalties. Annuities are treated just like any other retirement vehicle and are subject to the same penalties such as IRA's, 401K, and other qualified plans.
A 10% IRS penalty applies to anyone who takes money out of any annuity prior to attaining the age of 59 ½. The only exception to this rule is if you become totally disabled and need the money to help you live or if the annuitant dies. The other exception allows for a portion of the assets to be paid out as income on a regular basis.
Insurance Company Penalties
Almost all insurance companies allow for at least 10% free withdrawals a year from their annuities without incurring a penalty. Some fixed annuities allow for systematic withdrawals of interest only.
If you want to take out more money from your annuity contract above the free 10%, the portion above the 10% free withdrawal will be subject to the surrender charge. Make sure to call the insurance company prior to filling out a distribution form and sending it in. Make sure to find out how much this will cost you.
The last insurance company penalty is the market value adjustment (MVA). This may be an additional positive or negative charge in addition to the potential charges associated with your annuity. Again, always call your company first prior to taking any money above your free amount.
To find out more about annuity as accumulation vehicles, click on the link below in the resource box.
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