MYGA under age 59.5 penalties

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benderbr
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MYGA under age 59.5 penalties

Post by benderbr »

MYGAs continue to be yield significantly more than CDs. I'm hesitating to jump in because of the complexity dealing with the 10% tax penalty for those under 59.5. Can someone here who has paid this penalty share their experience? What kind of paperwork is involved here (is it an annual 1099 type form)? Does standard tax software cover this?
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Stinky
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Re: MYGA under age 59.5 penalties

Post by Stinky »

benderbr wrote: Sat Jan 02, 2021 2:19 pm MYGAs continue to be yield significantly more than CDs. I'm hesitating to jump in because of the complexity dealing with the 10% tax penalty for those under 59.5. Can someone here who has paid this penalty share their experience? What kind of paperwork is involved here (is it an annual 1099 type form)? Does standard tax software cover this?
I don’t have direct experience with this. But I would suggest that you call an annuity agent to pose this question. Blueprint, Stan the Annuity Man, etc.

Just to make sure you understand - there is no taxable income, and therefore no tax penalty, until you actually withdraw funds. Let’s say that you buy a 5 year MYGA at age 55, and allow the interest to accrue within the annuity. If you elect to receive the principal and accrued interest at age 60, you will not owe the tax penalty - just regular income tax on the interest.
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SpaceCowboy
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Re: MYGA under age 59.5 penalties

Post by SpaceCowboy »

I also believe you can avoid this by rolling into another MYGA at maturity until you reach 59.5. You might also be able to avoid it by using qualified (IRA or 401k) funds to buy it and roll the proceeds over into an IRA on maturity.
I jumped on the MYGA bandwagon in 2019. Good CDs are non-existent right now.
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HueyLD
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Re: MYGA under age 59.5 penalties

Post by HueyLD »

As Mr. Stinky said, there is no tax penalty unless you receive distributions.

And if you will be under 59 1/2 at the end of the guaranteed period, you can roll it over to another MYGA. It is no different from any other IRA money if qualified funds are invested. For nonqualified funds (I.e. non retirement money), you can also rollover to another MYGA to continue deferring taxes on earnings. No distribution, no income tax or penalty.
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benderbr
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Re: MYGA under age 59.5 penalties

Post by benderbr »

Thanks - good to know it can be rolled over. I still have 15+ years to go though, so not sure I want to commit to this investment style for that long without understanding more.
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Stinky
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Re: MYGA under age 59.5 penalties

Post by Stinky »

benderbr wrote: Sat Jan 02, 2021 4:33 pm Thanks - good to know it can be rolled over. I still have 15+ years to go though, so not sure I want to commit to this investment style for that long without understanding more.
On the one hand, I’d be hard pressed to recommend that someone who is 45 years old invest in any annuity (including a MYGA) in a taxable account. 15+ years is a long time, and much can change.

On the other hand, put the tax penalty in perspective. Let’s say you buy a 5 year MYGA at 2.50%. If the world changes over the next 5 years, and you decide to receive the principal and interest in 5 years, your 10% tax penalty will effectively reduce your interest rate by 10%, from 2.50% to 2.25%. Not a horrible outcome.
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Alan S.
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Re: MYGA under age 59.5 penalties

Post by Alan S. »

If you owe the penalty for distributions under 59.5, the penalty amount is reported on Sch 2 of Form 1040, and the total of Sch 2 additional taxes flows to line 23 of Form 1040.

For NQ annuities, the exceptions to penalty are basically limited to death and disability. The many additional exceptions that apply to qualified plans and IRAs do not apply to NQ annuities. If you are disabled, you can claim an exception by filing Form 5329, Part I and entering exception code 03 on line 2.

Since such penalty only applies to taxable amounts shown in Box 2a of Form 1099R, and taxable amounts are limited to the interest paid, not the principal (aka investment in the contract) being returned, it will be small, totally unlike an early IRA distribution which is usually all taxable.
Last edited by Alan S. on Thu May 20, 2021 5:34 pm, edited 1 time in total.
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benderbr
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Re: MYGA under age 59.5 penalties

Post by benderbr »

Thanks again for the replies. This is good info.

I wonder WHY there is a penalty here. I understand it for early withdrawal from tax deferred accounts, but this is post tax money going into a commercial product that's very similar to a CD. I never really looked into annuities before this.
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Stinky
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Re: MYGA under age 59.5 penalties

Post by Stinky »

benderbr wrote: Mon Jan 04, 2021 3:57 pm Thanks again for the replies. This is good info.

I wonder WHY there is a penalty here. I understand it for early withdrawal from tax deferred accounts, but this is post tax money going into a commercial product that's very similar to a CD. I never really looked into annuities before this.
At the time that Congress set the tax laws for annuities many years ago, annuities were regarded mostly as vehicles for retirement savings. As such, Congress wanted to discourage the use of annuities for short-term, pre-retirement savings. I expect that's where this tax penalty came from - people can withdraw before age 59.5, but it will cost them a little bit of money.

The tax penalty is also probably a trade-off for the favorable tax treatment of not taxing interest earned until it is withdrawn.

I think that MYGAs are a recent innovation that didn't emerge until years after the current tax law was written. MYGAs get the "general" annuity tax treatment, including the age 59.5 penalty.
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Cheego
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Re: MYGA under age 59.5 penalties

Post by Cheego »

Question about the federal tax penalty for withdrawals under 59-1/2...

If the MYGA matures before I turn 59-1/2, can I simply rollover the earned interest part of it and take back the principle to avoid the federal tax penalty?
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Stinky
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Re: MYGA under age 59.5 penalties

Post by Stinky »

Cheego wrote: Thu May 20, 2021 4:41 pm Question about the federal tax penalty for withdrawals under 59-1/2...

If the MYGA matures before I turn 59-1/2, can I simply rollover the earned interest part of it and take back the principle to avoid the federal tax penalty?
Nope. Distributions from an annuity are assumed to be interest first.

So, to avoid the penalty, you’d need to roll the whole thing into a new MYGA.
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JSparks
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Re: MYGA under age 59.5 penalties

Post by JSparks »

Stinky wrote: Thu May 20, 2021 4:45 pm
So, to avoid the penalty, you’d need to roll the whole thing into a new MYGA.
Sorry to resurrect this thread. Hoping Stinky will chime in.

In a NQ account, can a matured MYGA be rolled into anything else other than another MYGA?

I ask because our MYGA will mature before we turn 59-1/2 and I have some concern about what future MYGA rates will be like.
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Stinky
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Re: MYGA under age 59.5 penalties

Post by Stinky »

JSparks wrote: Wed Dec 08, 2021 6:43 pm
Stinky wrote: Thu May 20, 2021 4:45 pm
So, to avoid the penalty, you’d need to roll the whole thing into a new MYGA.
Sorry to resurrect this thread. Hoping Stinky will chime in.

In a NQ account, can a matured MYGA be rolled into anything else other than another MYGA?

I ask because our MYGA will mature before we turn 59-1/2 and I have some concern about what future MYGA rates will be like.
I was a little too prescriptive in my prior response.

A maturing MYGA could be 1035 exchanged into ANY annuity to avoid the age 59.5 penalty. A MYGA is certainly a possibility, and MYGA rates seem to have held up pretty well.

Another annuity that many Bogleheads approve of is the Fidelity variable annuity. With an administration charge of 0.25%, attractive fund choices, and no surrender charges, that’s a viable option too. Here’s a link to the Fidelity product:
https://www.fidelity.com/annuities/FPRA ... y/overview

Post back with questions.
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JSparks
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Re: MYGA under age 59.5 penalties

Post by JSparks »

Stinky wrote: Wed Dec 08, 2021 6:51 pm
I was a little too prescriptive in my prior response.

A maturing MYGA could be 1035 exchanged into ANY annuity to avoid the age 59.5 penalty. A MYGA is certainly a possibility, and MYGA rates seem to have held up pretty well.

Another annuity that many Bogleheads approve of is the Fidelity variable annuity. With an administration charge of 0.25%, attractive fund choices, and no surrender charges, that’s a viable option too. Here’s a link to the Fidelity product:
https://www.fidelity.com/annuities/FPRA ... y/overview

Post back with questions.
Thank you Stinky.
I don't see much of an upside on the FPRA, based on the few threads I've read here on it.
cashheavy18
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Re: MYGA under age 59.5 penalties

Post by cashheavy18 »

Posting here to see if I am misunderstanding anything - I have a 3 year MYGA with Oxford Life (purchased through Blue Print); Oxford Life has it titled as a multi-year guarantee deferred 3 year annuity - this is a TAXABLE account.

The policy comes due this July and I am under 59.5 years of age.

I read the entire policy and called Oxford Life on what the process is and if there are any penalties if I withdraw all of my funds at the end of the 3 year term. Their response was there is a 30 day window at the policy maturity date to complete a full withdrawal and there would be no penalties.

I asked what happens if I'm under 59.5, they said there is no age related penalty.

Who assesses the 10% withdrawal penalty (or how is it assessed) I keep reading about if one is under 59.5?
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Re: MYGA under age 59.5 penalties

Post by Stinky »

cashheavy18 wrote: Fri Feb 17, 2023 3:25 pm Posting here to see if I am misunderstanding anything - I have a 3 year MYGA with Oxford Life (purchased through Blue Print); Oxford Life has it titled as a multi-year guarantee deferred 3 year annuity - this is a TAXABLE account.

The policy comes due this July and I am under 59.5 years of age.

I read the entire policy and called Oxford Life on what the process is and if there are any penalties if I withdraw all of my funds at the end of the 3 year term. Their response was there is a 30 day window at the policy maturity date to complete a full withdrawal and there would be no penalties.

I asked what happens if I'm under 59.5, they said there is no age related penalty.

Who assesses the 10% withdrawal penalty (or how is it assessed) I keep reading about if one is under 59.5?
Oxford Life gave you an incomplete answer.

It is typical for MYGA companies to not levy any penalties if you withdraw at the end of an interest guarantee period. I can’t find Oxford’s products on the Blueprint website now, but I know that “no penalties by insurer” is typical industry practice.

However, there is a tax penalty of 10% for withdrawals from an annuity before age 59.5. This is disclosed on the Blueprint site in the “interest withdrawals details” section, as follows:
Note that any withdrawals made prior to age 59½ will incur a 10% penalty from the IRS.

You can avoid this penalty by either keeping the Oxford annuity until you reach age 59.5, or doing a 1035 exchange to another annuity.
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Re: MYGA under age 59.5 penalties

Post by Chardo »

cashheavy18 wrote: Fri Feb 17, 2023 3:25 pm Posting here to see if I am misunderstanding anything - I have a 3 year MYGA with Oxford Life (purchased through Blue Print); Oxford Life has it titled as a multi-year guarantee deferred 3 year annuity - this is a TAXABLE account.

The policy comes due this July and I am under 59.5 years of age.

I read the entire policy and called Oxford Life on what the process is and if there are any penalties if I withdraw all of my funds at the end of the 3 year term. Their response was there is a 30 day window at the policy maturity date to complete a full withdrawal and there would be no penalties.

I asked what happens if I'm under 59.5, they said there is no age related penalty.

Who assesses the 10% withdrawal penalty (or how is it assessed) I keep reading about if one is under 59.5?
It is not an Oxford penalty. It is an IRS penalty. One that can be avoided by rolling over to any new MYGA or other annuity. If you cash it out, the interest earned since day one is considered taxable income. If you are under 59.5, there is an additional tax penalty of 10%.
cashheavy18
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Re: MYGA under age 59.5 penalties

Post by cashheavy18 »

Thank you for all of the replies, I clearly understand the implications now.
Last edited by cashheavy18 on Fri Mar 17, 2023 9:44 am, edited 1 time in total.
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HueyLD
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Re: MYGA under age 59.5 penalties

Post by HueyLD »

Chardo wrote: Fri Feb 17, 2023 5:20 pm
cashheavy18 wrote: Fri Feb 17, 2023 3:25 pm Posting here to see if I am misunderstanding anything - I have a 3 year MYGA with Oxford Life (purchased through Blue Print); Oxford Life has it titled as a multi-year guarantee deferred 3 year annuity - this is a TAXABLE account.

The policy comes due this July and I am under 59.5 years of age.

I read the entire policy and called Oxford Life on what the process is and if there are any penalties if I withdraw all of my funds at the end of the 3 year term. Their response was there is a 30 day window at the policy maturity date to complete a full withdrawal and there would be no penalties.

I asked what happens if I'm under 59.5, they said there is no age related penalty.

Who assesses the 10% withdrawal penalty (or how is it assessed) I keep reading about if one is under 59.5?
It is not an Oxford penalty. It is an IRS penalty. One that can be avoided by rolling over to any new MYGA or other annuity. If you cash it out, the interest earned since day one is considered taxable income. If you are under 59.5, there is an additional tax penalty of 10%.
In addition to the federal 10% penalty, your state may also impose a similar penalty. For example, my former home state imposes an EWP at a percent of the federal penalty.
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Re: MYGA under age 59.5 penalties

Post by Alan S. »

Sec 72(q) lists all the NQ annuity penalty exceptions:
(q)10-percent penalty for premature distributions from annuity contracts
(1)Imposition of penalty
If any taxpayer receives any amount under an annuity contract, the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

(2)Subsection not to apply to certain distributions
Paragraph (1) shall not apply to any distribution—
(A)made on or after the date on which the taxpayer attains age 59½,
(B)made on or after the death of the holder (or, where the holder is not an individual, the death of the primary annuitant (as defined in subsection (s)(6)(B))),
(C)attributable to the taxpayer’s becoming disabled within the meaning of subsection (m)(7),
(D)which is a part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his designated beneficiary,
(E)from a plan, contract, account, trust, or annuity described in subsection (e)(5)(D),
(F)allocable to investment in the contract before August 14, 1982, or [2]
(G)under a qualified funding asset (within the meaning of section 130(d), but without regard to whether there is a qualified assignment),
(H)to which subsection (t) applies (without regard to paragraph (2) thereof),
(I)under an immediate annuity contract (within the meaning of section 72(u)(4)), or
(J)which is purchased by an employer upon the termination of a plan described in section 401(a) or 403(a) and which is held by the employer until such time as the employee separates from service.
Note that exception (D) applies to non annuitized distributions subject to the restated rules in Notice 2022-6. These rules are essentially the same as the 72(t) (SEPP) rules for qualified plans. Exception (I) applies to annuitized NQ plans. Report any exceptions not reflected in Box 7 of the 1099R using Form 5329 with the applicable exception code.
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