6. If I take annuity distributions before age 59½, will I have to pay additional taxes?
Typically, the taxable portion of a distribution from a tax-deferred annuity that is taken prior to age 59½ will be subject to an additional 10% federal tax.
However, here are some exceptions to this rule:
Death of the Owner
After the death of a deferred annuity owner, distributions to beneficiaries are not subject to the additional 10% federal tax.
If an annuity owner becomes disabled, the additional 10% federal tax on distributions may not apply. Make sure the disability meets the IRS definition and regulations.
Substantially Equal Periodic Payments (SEPPs)
Distributions taken as SEPPs are free of the additional 10% federal tax. The payments must continue to age 59½ or for five years, whichever is longer.
The IRS allows you to fully exchange one deferred annuity contract for another without tax consequences, no matter your age. To qualify:
- The owner(s) and annuitant(s) of both contracts must be the same.
- The exchange must take place directly through the insurance companies. Cashing out one contract to purchase another may be a taxable event.
You also can perform a partial 1035 exchange, which means a portion of your annuity contract is exchanged for another contract. However, be aware that if you take distributions from either contract within 180 days of the exchange, the IRS may consider the exchange “disqualified” (that is, no longer tax-free).