10% Penalty on Annuity

Feb 12, 2018

  1. Julieolo
    Offline

    Julieolo Expert

    Posts:
    40
    Likes Received:
    10
    State:
    California
    I apologize in advance if I am in the wrong place to be asking such questions. My financial adviser is not able to answer this question and I am afraid of misunderstanding any of the research I have done on the internet.

    I have an annuity that has already been taxed. I currently only get a monthly payment of the interest earned on the money. I found out when it was tax time that I will be paying a 10% penalty on that interest money that I get each month because I am under the age of 59 1/2.

    I would like to up my monthly amount to more than just the interest and I am wondering, even though I have already paid taxes on this money if I will still have to pay 10% on all the money if I up my monthly payment beyond just the interest earned.

    For example: Say I receive $400 a month and that is the interest earned on the account and I am paying 10% penalty for being under the age of 59 1/2. If I change my monthly payment to $2000 a month will I have to pay a 10% penalty on $2000.

    Thank you in advance
    Julie
     
    Julieolo, Feb 12, 2018
    #1
  2. DHK
    Offline

    DHK "YOU CAN'T HANDLE THE TRUTH!"

    Posts:
    7,226
    Likes Received:
    997
    State:
    California
    1. I'm not 100% sure I know what you mean that "my annuity has already been taxed". I am simply going to assume (I hate that word) that you mean that your annuity is a "non-qualified" annuity. Non-qualified annuities are taxed LIFO - last in, first out. That means that interest comes out and is fully taxable, but your principal is not.

    Regarding 10% penalties: If your advisor was smart, they would've set up the payments originally to be in accordance to 72(q) withdrawals. These payments would continue for 5 years OR until age 59 1/2... whichever is LONGER. Then, as long as you didn't touch the amount of the payments, these payments would be EXEMPT from the 10% penalty on the interest earned.

    2. As far as increasing your payments from $400 interest only to $2,000 principal & interest, you shouldn't have to pay a penalty on the additional $1,600 (for example) because this is a non-qualified annuity and this is simply return of principal.

    Now, that does NOT mean that it may not be subject to a SURRENDER charge. That is subject to the contract you have, how long you have had it, and the schedule set by the insurance company.

    In short, there are "IRS rules" and there are "House rules". The 10% penalty applies to "IRS rules", while the surrender charge (if applicable) applies to "House rules".
     
    DHK, Feb 12, 2018
    #2
  3. Life Hawk
    Offline

    Life Hawk Guru

    Posts:
    1,560
    Likes Received:
    1,305
    State:
    Illinois
    How old are you and can you wait to withdraw? Simple... don't pay taxes where you don't have to.
     
  4. Julieolo
    Offline

    Julieolo Expert

    Posts:
    40
    Likes Received:
    10
    State:
    California
    Thank you DHK for your response.

    According to my financial adviser there is no surrender fee but he has misled me before so I'm a little worried.

    Yes, it is a Non-qualified annuity.

    I just sent my financial adviser an email asking him if my account was set up in "accordance to 72(q) withdrawals". I'm guessing not because I did have to pay a 10% penalty last year when I did my taxes. When I asked my financial adviser why he did not mention anything about the penalty he said he didn't know anything about the IRS side and that I would have to ask a CPA. I could be wrong but it seems to me like he should have know since he has been doing his job for a few decades now.

    I appreciate your information. It was very helpful to me.

    Life Hawk...I am 58. I would wait if I thought I had to pay the penalty fees. I hate to waste good money.

    Thank you,
    Julie O
     
    Julieolo, Feb 12, 2018
    #4
  5. DHK
    Offline

    DHK "YOU CAN'T HANDLE THE TRUTH!"

    Posts:
    7,226
    Likes Received:
    997
    State:
    California
    Wow! He should've known. Sounds too lazy to me.

    There's a difference between giving tax advice (such as how you file, etc.) and tax advice incidental and related to the sale of financial products. He should've known this. Absolutely no reason not to. Could lead to malpractice.

    I remember (but cannot find) a complaint about a bank rep who was advising a client regarding their IRA, but completely left out talking about the tax consequences of liquidating the $30,000 IRA and putting it in their checking account. This caused taxes and penalties that were not even discussed. They complained to the firm about the rep and received damages (I believe).

    This is not legal advice, but you could have a legitimate complaint, particularly for his years of experience. He should've known. You can start by contacting his firm's compliance department.

    EDIT: Here's the link that you could forward to him: FINRA award goes to client after advisor’s tax oversight

    Since it requires that you register for the site, here's the article's contents:
    I've also uploaded a PDF version of the article.
     
    Last edited: Feb 12, 2018
    DHK, Feb 12, 2018
    #5
  6. DHK
    Offline

    DHK "YOU CAN'T HANDLE THE TRUTH!"

    Posts:
    7,226
    Likes Received:
    997
    State:
    California
    If you want to be nasty to him, email a copy of the article to him along with a note that you will be contacting his firm's compliance officer regarding the negligence of lack of tax advice incidental to your annuity. That just might get him to shape up and learn some stuff.
     
    DHK, Feb 12, 2018
    #6
  7. Julieolo
    Offline

    Julieolo Expert

    Posts:
    40
    Likes Received:
    10
    State:
    California
    Thanks DHK, interesting article.

    I actually did talk to his compliance manager last year after I found out about the 10% penalty. I felt like she just blew it off. I made her go over the policy with me in great detail. But after a time we came across a small checked box and she had to make some calls and call me back the next day. That little checked box changed the policy completely. I even wondered if she really was the compliance manager and looked her up. I have spent the last year stressed and wondering if my money is even safe with them.

    I am trying to communicate with my financial adviser through email so I can get him to tell me in writing that there will be no surrender charges but he probably will not respond back by email.

    Are there attorneys that specialize in this sort of thing? I'm sure he would say that he told me something different and I fear that it would be his word against mine.

    I appreciate the time and the information you have supplied.
     
    Julieolo, Feb 12, 2018
    #7
  8. DHK
    Offline

    DHK "YOU CAN'T HANDLE THE TRUTH!"

    Posts:
    7,226
    Likes Received:
    997
    State:
    California
    There certainly are. The most prolific one that *I* am familiar with, is Ilya Lerma out of Phoenix, AZ. I would probably contact her office and ask for a referral for an attorney in your area for your case.

    Law Office of Ilya E. Lerma LLC | Lawyer in Phoenix

    This first video clip is geared towards consumers:


    These next three video clips are geared towards advisors for best practices to avoid possible complaints from clients. One of the things that's so easily avoided... is to just communicate with the client and make it right.







    Another option would be to file a complaint through either (or both):
    CA Department of Insurance (www.insurance.ca.gov)
    FINRA (Have a Problem? | FINRA.org)

    Of course, you can contact compliance FIRST with your intention to notify regulators about your situation.
     
    DHK, Feb 13, 2018
    #8
  9. Julieolo
    Offline

    Julieolo Expert

    Posts:
    40
    Likes Received:
    10
    State:
    California
    Awesome, thank you!
     
    Julieolo, Feb 13, 2018
    #9
  10. DHK
    Offline

    DHK "YOU CAN'T HANDLE THE TRUTH!"

    Posts:
    7,226
    Likes Received:
    997
    State:
    California
    Normally, I wouldn't advocate making a formal complaint against an agent or advisor. However, annuities and retirement income planning are BIG subjects where you're dealing with people's larger sums of money and you have to get it right.

    To have decades of experience and "didn't know anything about the IRS side"... is the laziest thing I've ever heard. I don't necessarily expect an advisor to know everything about the IRS tax code - or even that we have tiered tax brackets with itemized or standard deductions, etc.,... but it IS our responsibility to know the tax information that is incidental to the sale and servicing of the products we sell. To have "decades of experience" and NOT know the basics of taxation surrounding annuities... is malpractice and gross negligence on the most basic level. To not even know about how a 72(q) distribution program would work... is stupid. (He's probably missing out on a lot of sales for being ignorant on the topic too.)

    Now, it would be different if the income calculation was done and it wouldn't meet your needs, and that conversation and calculation was documented. That would be a different story. But this... is almost unbelievable.

    To me, based solely on this thread, that makes him a target that is ripe for learning from such a huge error in judgment.
     
    DHK, Feb 13, 2018
    #10
Loading...