Using funds from annuities may prove costly
Published: Monday, November 16, 2009, 8:00 AM
By Karin Price Mueller/The Star-Ledger
Q. I am 37 years old and want to buy a house. The problem is the down payment. The only money I have access to is an annuity worth $15,000. I called the administrator and he said that I can withdraw the money for a house purchase. My question is concerning the tax implications. Is there a penalty involved?
A. Annuities are a good investment for some, but for others, especially those who wish to access the money before retirement age, annuities can be very expensive. Annuities are not generally recommended sources of money for a home down payment, but if it’s all you have, here’s what you need to think about.
There may be several layers of tax and penalty to consider.
‘‘The amount of the withdrawal representing the earnings in the contract will be subject to federal and state income tax,’’ said Howard Hook, a certified financial planner and certified public accountant with Access Wealth Planning in Roseland. ‘‘In addition the IRS may impose a 10 percent ‘early’ withdrawal penalty on the earnings.’’
Hook said the annuity contract itself may impose a penalty as well, especially if you haven’t owned the annuity for very long. It may charge a “surrender fee,” or penalty, if you pull out your money within a certain time period from the original annuity date.
‘‘It is not uncommon for annuities to impose penalties on withdrawals up to as much as the first 10 years of a contract,’’ Hook said.
Surrender fees can be as high as 10 percent in the first year of annuity ownership, typically dropping one percentage point a year until the surrender fee period is exhausted.
Because each annuity contract may very greatly depending on the issuing company, call your administrator again, as they should be able to give you the specific answers to your policy, including penalties associated with it, said Tyler Vernon, chief investment officer of Biltmore Capital Advisors in Princeton.