If you are preparing to take a distribution from your retirement account, regardless of whether it's an individual retirement account (IRA), 401k, or an annuity, the process of initiating the withdrawal is the same. You must understand the income tax consequences of taking money out of a retirement plan, as well as the potential penalties if you are under age 59 1/2. The forms and documentation required to request the withdrawal are simple enough to complete, but the effects to your financial situation can be complicated.
1. Decide how much money you want to withdraw. Once you reach age 59 1/2, you are old enough to begin taking ordinary distributions from an annuity. You may withdraw any amount you choose, but you are under no obligation to immediately begin taking distributions at this age.
2. Consider the potential income tax liability. Every withdrawal from your equity indexed annuity may increase your taxable earnings for that year. Determine your tax liability prior to taking distributions from your annuity. Calculate how much you can safely withdraw without raising your income to the next tax bracket.
3. Contact the annuity carrier. Call the insurance agent who sold you the policy, or the policy holder services number listed in your contract. Explain your desire to begin taking distributions from your annuity and request the paperwork necessary to initiate a withdrawal.
4. Complete the required distribution request paperwork. Enter your information on the form and indicate the amount and frequency of the withdrawals. Indicate whether you want the annuity company to withhold a portion of each distribution for anticipated income taxes.
5. Sign and return the withdrawal request documents. Double check that all relevant pages are completed, and all necessary information is entered. Fax or mail the form to the annuity carrier.
1. Analyze the potential income tax ramifications. Consider that most distributions before age 59 1/2 result in a penalty tax of 10 percent of the withdrawal amount.
2. Investigate early withdrawal penalty exceptions. Certain situations may exempt you from being forced to pay the 10 percent penalty. For example, if you use the money to pay significant medical expenses that comprise more than 7 1/2 percent of your income, or if you become disabled, the IRS will waive the penalty. The same goes if you are using the funds to buy a first home or pay for a college education. However, even if you meet the eligibility criteria for exemption from the penalty, you will still be required to pay ordinary income taxes.
3. Choose the amount of your early withdrawal. Evaluate the potential benefits along with the likely penalty fees and determine how much money you must withdraw to meet your needs. Consult a tax professional for assistance and advice before making any decisions.
4. Request distribution paperwork from the annuity carrier. Call the life insurance company that issued your annuity and ask for the withdrawal paperwork.
5. Complete and sign the distribution request forms. Enter your personal information and annuity account details on the withdrawal forms. Acknowledge your understanding of the potential tax ramifications and additional penalties for early withdrawals by initialing the appropriate section. Fax or mail the completed paperwork to the insurance company.
Required Minimum Distributions
1. Calculate the size of your required minimum distribution (RMD). Use the worksheet available from the IRS website, and determine the minimum amount you must withdrawal from your annuity.
2. Obtain the annuity withdrawal paperwork. Contact your annuity carrier's customer service department and request that distribution forms be mailed, faxed or emailed to you.
3. Complete the forms. Provide the required details about your account and indicate that your withdrawal request is because of a required minimum distribution. Enter the dollar amount that corresponds with the RMD worksheet results.
4. Return the forms to the insurance company. Fax the signed and completed paperwork to the number listed on the forms, or mail them to the address indicated in the instructions.
- A withdrawal from an annuity, regardless of whether the annuity is fixed, variable or equity indexed, will likely increase your taxable earnings for the year. Discuss your financial situation and income tax status with a qualified accountant or CPA prior to submitting any forms to the insurance company.
- Retain copies of your withdrawal paperwork. If you mail the forms to the insurance company, make photocopies before sealing the envelope. Store your copies of the documents in a safe place for future reference.
- Sizable distributions may raise your taxable income to a level commensurate with an increased income tax bracket. Discuss your current financial situation with a qualified tax professional to determine how close your income is to the next bracket, and whether your annuity distributions will push you into that bracket.
- Most equity indexed annuity contracts contain surrender schedules. If you close your account, or withdraw too much money too soon after opening the account, you may be penalized by the insurance company. These penalties are separate from any IRS fees for early withdrawals and may be imposed even if you are older than 59 1/2.
Items you will need
- Annuity withdrawal forms
- IRS.gov: Required Minimum Distribution Calculation Worksheet
- IRS.gov: Retirement Plan FAQs Regarding Required Minimum Distributions
- Illinois Dept. of Insurance: Buyers Guide to Equity Indexed Annuities
- Smart Money: Tapping Your IRA Penalty-Free
- Charles Schwab: Generating Cash Flow From Your Retirement Portfolio; Rande Spiegelman; December 18, 2009
- New York Life; Ordinary Income Taxes on Retirement Plan Distributions; November 2004
- Stockbyte/Stockbyte/Getty Images