Advanced Underwriting Consultants

Question of the Day – August 3

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has a jointly-owned deferred annuity with her husband.  My client is 56, and her husband is 61.  If they take a taxable distribution from the annuity contract, will the distribution be subject to the 10% premature distribution penalty?

Answer: In general, half the taxable distribution will be subject to the penalty tax.

Taxable distributions from a nonqualified annuity are generally subject to an extra 10% penalty tax when the taxpayer is younger than 59 ½.  There are a few exceptions for distributions due to death or disability, or if the distributions are part of an equal series of payments based on life expectancy.

Where there are joint owners of an annuity, the owners are usually treated as each owning 50% of the account from a tax perspective.  So if a distribution is taken, it is taxable 50% to each of the joint owners.

Thus, if one of the owners is younger than 59 ½, the taxable amount of the distribution allocated to that owner will be subject to the penalty tax.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.