MYGA and 59.5

[hotwired]

Strange but I cannot find an answer this question via Google. Are MYGA's subject to a 10% tax penalty if you have one that matures before you're 59.5 and you take the money out? I mean my understanding is that they're basically insurance company's versions of CDs (with a couple of policy differences). But I swear I read something recently that said they might be subject to 10% tax penalty if you take the money out (vs. roll it into another) before 59.5. I'm guessing that's wrong OR maybe what I read pertained to using IRA funds for the MYGA in the first place (qualified vs. non qualified). Any help appreciated.

Side note, I have a friend who's got a 250K CD maturing...wants to put it somewhere 100% safe, won't need funds for 7-10 years, not taxed until withdrawal, and wants it all in one place vs. slice and dice. He's 47. I'm thinking MYGA fits the bill perfectly unless indeed there is a penalty for pre-59.5 termination.

Thanks again.

 

[Gumby]

I would guess that it depends on whether you use pretax or post-tax money to fund it initially, but I really don't know.

 

[RetiredHappy]

If it is bought with IRA money, then it is subject to the 59.5 yo rule. If taxable funds are used, then the interest is subject to income tax.

 

[pb4uski]

Strange but I cannot find an answer this question via Google. Are MYGA's subject to a 10% tax penalty if you have one that matures before you're 59.5 and you take the money out? I mean my understanding is that they're basically insurance company's versions of CDs (with a couple of policy differences). But I swear I read something recently that said they might be subject to 10% tax penalty if you take the money out (vs. roll it into another) before 59.5. I'm guessing that's wrong OR maybe what I read pertained to using IRA funds for the MYGA in the first place (qualified vs. non qualified). Any help appreciated.

Side note, I have a friend who's got a 250K CD maturing...wants to put it somewhere 100% safe, won't need funds for 7-10 years, not taxed until withdrawal, and wants it all in one place vs. slice and dice. He's 47. I'm thinking MYGA fits the bill perfectly unless indeed there is a penalty for pre-59.5 termination.

Thanks again.

Yes, if the owner is under 59-1/2 then the 10% tax penalty for early withdrawal applies. It is the quid pro quo for the income being tax deferred which is a feature of annuities.

https://www.investopedia.com/ask/an...ies-withdrawing-monies-invested-annuities.asp

 

[hotwired]

Thanks everyone. That was the missing piece. Shoot, there's some great rates out there. I'm just realizing what a great tool MYGA's CAN be as long as you don't need funds before 59.5. I'm 58.5 now. My friend just scored a 7 year 5.65% MYGA.

 

[jazz4cash]

I would say it’s a great tool if you also don’t need to take funds during the surrender period.

 

[MBSC]

If it is bought with IRA money, then it is subject to the 59.5 yo rule. If taxable funds are used, then the interest is subject to income tax.

Be aware that if you redeem them at maturity before 59 1/2, there is a 10% IRS penalty. Even for after tax accounts.

I found this out the hard way when my Fidelity advisor recommended cashing them out at maturity. If she put them in my husband’s name as the annuitant, we would have saved a nearly 4 k tax penalty since he is over 59 1/2. She apologized, saying that she didn’t realize, but Fidelity won’t make me whole or even offer me a retention bonus in good faith.

As Lucie said, both qualified and non-qualified (taxable) MYGAs are subject to the 10% penalty. The difference is the penalty only applies to the earnings of a taxable MYGA. The IRS considers them to be a retirement product.

Avoiding the 10% Early Withdrawal Penalty

The IRS imposes this penalty on distributions taken from both qualified and non-qualified annuities before the age of 59½, with specific exceptions.

The 10% Early Withdrawal Penalty

The IRS enforces a 10% penalty on early withdrawals from both qualified and non-qualified annuities, which is in addition to ordinary income taxes on the distribution. This penalty aims to discourage the use of retirement funds before retirement age, ensuring these savings are available for future needs.

An important takeaway is the tax treatment of qualified versus non-qualified annuities. Qualified annuities, funded with pre-tax dollars within vehicles like IRAs or 401(k)s, are taxed upon distribution. Non-qualified annuities, funded with after-tax dollars, subject only the earnings portion to taxation upon withdrawal.

Importantly, withdrawals from both qualified and non-qualified annuities before age 59½ may incur a 10% tax penalty on the taxable portion.

Source: The Ultimate Guide to Tax Implications and Benefits of Annuities in Retirement Planning | Blueprint Income

 

[RetiredHappy]

As Lucie said, both qualified and non-qualified (taxable) MYGAs are subject to the 10% penalty. The difference is the penalty only applies to the earnings of a taxable MYGA. The IRS considers them to be a retirement product.

I am not sure if we are talking about the same thing. I buy MYGA with my brokerage account all the time and take money out, interest and principal all the time. When I read the question about "early withdrawal before 59.5 yo", it does not matter on the age when you buy a MYGA with taxable brokerage fund. I take the intereest out and principle without penalty. There is no test of whether I am 59.5 yo or not.

 

[pb4uski]

From the link in post #4:

... Even non-qualified annuities (those purchased with after-tax dollars and not held in a retirement account) require the owner to reach the age of 59½ before taking penalty-free distributions. ...

 

[RetiredHappy]

From the link in post #4:

I have always used it in place of CDs. To be honest, I just leave the money to co-minger with the rest of my funds. Whether I have taken them out or not, I have no clue.