Annuities provide tax-deferred growth on your deposits. You pay tax on the gain when you pull it out. Withdrawals made prior to age 59 1/2 are also subject to a 10 percent penalty tax, but a few situations offer a break from the penalty. While general hardship doesn’t trigger the penalty waiver, some particular hardships might qualify.
Unemployed Health Insurance Premiums
You lost your job and with it your employer-provided health insurance. Federal law gives you the option to continue in your employer’s plan as long as you pick up the premium. Alternatively, you could apply for an individual policy. Either way you’re left having to pay more while you’re not earning. You can tap into your annuity to cover health insurance premiums while unemployed without any penalty.
With or without health insurance, medical bills can be daunting. If your medical expenses exceed 10 percent of your adjusted gross income, you not only qualify for a tax deduction, you can also cover those expenses with a penalty-free withdrawal from your annuity. The exemption only allows for withdrawals to cover bills in excess of that mark. For example if you had $10,000 in medical bills and $50,000 AGI, you could withdraw $5,000 penalty free.
Called to Active Duty
If you’re a reservist, you might face sudden changes to your financial picture when called to active duty for an extended amount of time. You can take penalty-free withdrawals if you’ll be on active duty for 180 or more days. If you've established your annuity as a qualified retirement plan, you even have the ability to repay yourself without affecting your annual limits. You have up to two years after active duty ends to make the repayments.
Internal Revenue Service Levy
You fell behind on your tax bill. If you’re delinquent on your taxes, you might be able to catch a break. The 10 percent early withdrawal penalty doesn’t apply if the IRS makes the withdrawal as a levy. You still have to pay taxes on any previously untaxed growth they take out. Asking the IRS to levy your annuity to pay the delinquent taxes lets you avoid the extra sting of a penalty.
- Cornell University Legal Information Institute: 26 USC Section 72 - Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
- Cornell University Legal Information Institute: 26 USC Section 6331 - Levy and Distraint
- Internal Revenue Service: Tax Topics - Topic 558 Additional Tax on Early Distributions From Retirement Plans, Other Than IRAs
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.