AboutDavid M Iannopollo Expertise I am a professional financial advisor who can assist you with answers on mutual funds, annuities, IRA's, rollovers, qualified and non-qualified retirement plans, retirement planning, educational planning, life, disability and LTC insurances.
Experience I have over 20 years experience in the business and financial world.
Question This 2006 my husband I took out 13,000 in order to pay our real estate taxes. My financial advisor told me that we don't pay taxable income on the annuity, that all we are suppose to pay is 10% penalty because my husband is not quite 59 1/2 years old yet. The accountant added the 13,000 as earned income, and my financial advisor said that was not right. The annuity is with Metlife we purchased this annuity with money from the sale of a rental home quite a few years ago. Can you tell me what I'm suppose to be paying out on my tax returns?
Answer Hi Maria,
Most likely your advisor doesn't understand the taxation of annuities in regards to withdrawals.
A withdrawal is any amount distributed from the annuity that is not part of the annuitization process. Those payments are taxed based on when the annuity was purchased. Investments made after August 13, 1982, are taxed on a last-in, first-out basis. That means for income tax purposes the first money out of the annuity will be considered as earnings, not principal, and will be taxed as ordinary income when withdrawn from the contract. Additionally, just like a traditional IRA, withdrawals made prior to the annuitant's age 59 1/2 are subject to a 10% early withdrawal penalty.
Here's an example, your originally started with a $100,000 investment. It has grown to $150,000 over time. If you make a single withdrawal of $50,000 or less, the whole amount is taxable as ordinary income. If you withdraw more than $50,000, only the first $50,000 is taxable.
To put it briefly, if you had more than a $13,000 investment gain, then your accountant is correct.
Unfortunately many people selling annuities don't understand the taxation on them and pass along misinformation to their clients. I hope this clarifies the matter for you. Thanks and best of luck!
