I have a 49-yr old prospect who has $1.5 million to invest. He wants immediate income on some of this money. I've told him that if he takes a deferred annuity and wants to start the income stream before age 59 1/2 that he'll have a 10% penalty in addition to having it (the gain) taxed as ordinary income. I'm curious if there is any way an individual can legally avoid this 10% penalty? I've also presented a SPIA to him.Thanks.
Well, you found one way already which is to utilize a SPIA.
Non-Qualified annuities can be accessed in a variety of ways that don't trigger the 10% penalty (like death and disability) but probably the one that you're looking for falls under section 72(q).
Very similar to a section 72(t) early distribution from an IRA, a 72(q) requires a SEPP (substantially equal periodic payments) based payout. The IRS has three calculations that qualify for this treatment: the rmd method, the annuitization method or the amortization method. These are just calculations...you're not actually annuitizing.
Your client will have to take these payments to the later of age 59 1/2 or 5 years. Most alterations to the amount being distributed (it's the IRS, there are always exceptions) will cause a retroactive 10% penalty to be applied so make sure that the distribution amount makes sense for your client since he'll be stuck with it for a while.
I hope that this helps and good luck...it sounds like a nice case.
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"Tahoe Ray-Is there anyway the 49 yr old would incur the 10% penalty on the SPIA? Thank you for the great feedback on section 72(q). "
NOPE. Have one going my self at 53 for the last three years. What Tahoe Ray is referring to is how to make something work like a SPIA to avoid the 10% hit.
So you could do a SPIA on some like you mentioned and something else on the other funds. You may want to look at what I think is called "step annuities" concept.
NOPE. Have one going my self at 53 for the last three years. What Tahoe Ray is referring to is how to make something work like a SPIA to avoid the 10% hit.
So you could do a SPIA on some like you mentioned and something else on the other funds. You may want to look at what I think is called "step annuities" concept.
Distributions would have to start in the first year. If his money was already in an annuity that was at least 1 year old and you 1035'd it into a SPIA, that may cause a 10% penalty.
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Laddering annuities would be the best as the previous posts mentioned. There are some good laddering presentations out there that you can use. For a case that size a nice presentation would look good, also put in adjustments for inflation in the presentation.
