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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10122
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have an annuity fund with my company and i would like to

Customer Question

I have an annuity fund with my company and i would like to transfer the funds to a prepaid florida college plan. Can i do it without tax penalties?
Submitted: 1 month ago.
Category: Tax
Expert:  Lane replied 1 month ago.

Hi Annetta. My name's Lane ... I can help here.

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So sorry, no. Neither IRA's, qualified workplace plans like 401(k)s. nor on-qualified annuities can be rolled into a 529.

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An annuity has limits on contributions and strict rules about withdrawals or transfers to other plans.

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If it's not qualified, not funding an IRA or qualified plan then you can only do a 1031 exchange into another life insurance product.

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You can roll over IRA funds and other plans into many other types of retirement plan (if the annuoity is inside a qualified plan), but you cannot roll them over to a 529 account, and you could face some taxes and penalties if you use IRA funds to establish or build a 529.

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Now, if this ISN'T qualified, the you may want to look at annuitizing with with what's called a "period certain" settlement option ... this lets the annuity come to you with part of the money being a return of your premium and a part taxable interest ,,, this mught be one way to "lighten" the tax load.

Expert:  Lane replied 1 month ago.

But if you're under age 59 and 1/2 (unless you take the payments out over your life expectancy) there woul still be that 10% early retirement penalty (qualified OR non-qualified).

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Please let me know if you have any questions at all, before you rate me

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If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit").

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Thanks!

Lane


I have a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Customer: replied 1 month ago.

Ok so I cant roll it over to a 529 plan. How about if i withdraw it in cash, they charge 20 percent right away. How about the additional 10% at tax filiing? Is there any way this can be avoided? does it depend on income level? or the amount of disbursement?

Expert:  Lane replied 1 month ago.

Great question ... it's actually both.

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If this is qualified dollars (all re-tax contribution as with a 401(k) or deductible IRA, then everything distributed is added to your taxable income for the year.

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If this was is non-qualified annuity where the money went in on an AFTER tax (no deduction) basis, then only the growth in the annuity is taxable. BUT regardless of what amount you withdraw, the interest/growth comes out first ... so if this is a NON-qualified annuity and you pull EVERYTHING out Some of the dollars won't be taxable.

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And again for either, the taxable portion (all or some, depending on whether this is all pre-tax or not AND on how much you pull) is added to your other taxable income for the year.

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So if your other income puts you in, say, the 15% bracket, then the withdrawal will be taxed at 15% and then some of it at 25% or higher as the amount distributed pushes you into higher brackets.

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(with the 10% being added, for being under age 59 and 1/2 as well)

Customer: replied 1 month ago.

This is my husbands annuity fund through the union. His income was $118,000 last year. It is going to be less this year. What are the tax brackets for this year?

Customer: replied 1 month ago.

But why 10%? If they already charge 20% out of it before they disburse it to us, why the 10% additional? Is it a tax penalty? I understand that if we are in lets say 15% tax bracket than we pay 15% on all income, the annuity gets charged 20%. So why another 10%?

Expert:  Lane replied 1 month ago.

First... here are the brackets for married filing jointly (also note that you can subtract the standard deduction and two personal exemptions (12600 + 4050 + 4050) becasue this is TAXABLE income.

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Married Filing Jointly or Qualifying Widow(er) Filing Status

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

  • 10% on taxable income from $0 to $18,150, plus
  • 15% on taxable income over $18,150 to $73,800, plus
  • 25% on taxable income over $73,800 to $148,850, plus
  • 28% on taxable income over $148,850 to $226,850, plus
  • 33% on taxable income over $226,850 to $405,100, plus
  • 35% on taxable income over $405,100 to $457,600, plus
  • 39.6% on taxable income over $457,600.

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And the 20% is not really you paying the tax, it's a withholding (just like withholding from your paycheck at work) - a prepayment against whatever you end up owing when you file taxes in April.

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Say, you were in the 10% bracket, (and the withdrawal didn;t push any of the income over that) then the 20% would be enough to cover everything, and not another dollar would be owed at tax time

Expert:  Lane replied 1 month ago.

Said differently, if you were in the 15% bracket and the total income including the distribution was all still in the 15% bracket and there were't a 10% tax penalty, (all other things being equal) you'd get a tax refund.

Customer: replied 1 month ago.

I get it. Thanks.

Expert:  Lane replied 1 month ago.

You're very welcome ... Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …is thanks enough.

Otherwise I receive no crediting for the work here.

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Thank you!

Lane

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