| tter what type of annuity you purchase, it is subject | | | | centenarian. But even with the penalty, it could still |
| to a 10 percent IRS penalty for withdrawals of | | | | make good sense for a young person(s) but would |
| growth of income made prior to age 59 ½. No | | | | depend upon how soon the money is withdrawn and |
| penalty is imposed on one's principal, i.e. the money | | | | the assumed rate of growth. |
| put in by the owner is the owner’s money. | | | | Inside an annuity, the contract-holder’s |
| It makes no difference how old the annuitant (or | | | | money will grow and compound tax-deferred, not |
| owner) of the contract is, if they die then there is no | | | | tax-free. To say it another way, any and all income |
| penalty. Also, the Section 72 of the IRS Code states | | | | tax liability can be postponed indefinitely. The death |
| that the penalty is waived if the annuitant (or owner) | | | | of one spouse will not trigger income taxes provided |
| is disabled. Generally, it must be the death or disability | | | | that the beneficiary was the surviving spouse. What |
| of the annuitant, not the contract owner or | | | | happens when the surviving spouse remarries? The |
| beneficiary, except where the contract is | | | | survivor can name themselves as the beneficiary and |
| owner-driven, in which case all IRS penalties will be | | | | can name a new partner as the annuitant. When the |
| waived upon death or disability of the owner. | | | | last spouse dies, the beneficiary(s) can postpone |
| If the contract is annuitized, it will avoid penalty, but | | | | taxes for up to an additional five years. |
| such annuitization must be elected by the contract | | | | Income taxes are always due in the year in which |
| owner within one year after investing in the annuity. | | | | income or growth of the fund is received. The return |
| The age of the owner does not have to be 59 | | | | of principal is never taxed, regardless of who |
| ½, indeed it is irrelevant. | | | | receives the money. The amount of taxes on the |
| The final way in which the 10 percent IRS penalty | | | | growth will be based on the tax bracket of the |
| can be avoided is the contract owner being age 59 1 | | | | person receiving the funds. Unfortunately the taxable |
| 2 or older. | | | | portion is always considered as ordinary income, and |
| Because of these penalties, annuities are usually | | | | does not qualify for capital gains treatment. |
| recommended for younger people unless it is part of | | | | As is obvious, taxes will have to be paid at some |
| a retirement plan such as an IRA or pension plan or | | | | time or other. This may be considered as a |
| profit-sharing plan. Of course, there is always the | | | | “negative” but perhaps it is not all bad. |
| exception of the person who has sufficient funds so | | | | For instance, the owner of the annuity decides when |
| that they would not have to touch the funds in case | | | | withdrawals are to be made. Therefore, one would |
| of an emergency. Annuities are ideal candidates for | | | | attempt to take out the money when they are at |
| the investor who is near or past age 591/2. | | | | the lowest income tax bracket, i.e. their income is the |
| Unless the contract is “owner-driven”, | | | | lowest. Frequently this is when the person retires. |
| the owner can be any age, from newborn to | | | | |