IRS Gives Owners More Flexibility

Under the law, early distributions from annuities generally are subject to a 10% penalty tax. However, the penalty tax is waived if the distribution satisfies one of the exceptions set out in the Code.

Specifically, the distribution will not be subject to a penalty tax if it is part of a series of substantially equal periodic payments (not less frequently than annually).

There are 3 methods for determining whether distributions satisfy the requirement for substantially equal periodic payments. These are the required minimum distribution method, the fixed amortization method and the fixed annuitization method.

If the payments are subsequently modified, the penalty tax plus interest are imposed on the annuity owner, with one exception. An individual who begins receiving distributions in a year using either the fixed amortization method or fixed annuitization method may switch to the minimum distribution method and the change will not be treated as a modification triggering the penalty tax.

Any subsequent change, however, will be treated as a modification.

Prior to the new notice, this methodology and the one-time switch applied specifically to qualified annuities. The new notice applies the methodology and the one-time switch to nonqualified annuities as well.

Reproduced from National Underwriter Life & Health/Financial Services Edition, March 5, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.