10% early distrib penalty from Annuity | Ed Slott and Company, LLC

10% early distrib penalty from Annuity

Client wants to purchase a single premium immediate 5 yr annuity for 25 year old daughter..
I don't like the idea because the earnings will be taxed as ordinary income, but my question is this: won't the taxable distributions be subject to a 10% penalty? Is there an exception to the 10% early withdrawal penalty?
Jim

In this case, none of the usual exceptions in Sec 72q appear to apply. While there is an "immediate annuity" penalty exception for annuities meeting the requirements of Sec 72(u), one of the 72(u) requirements is that the immediate annuity be based on one of the 3 approved methods for calculating SEPP payments. All of these methods are based on life or joint life expectancy, so a 5 year payout for a 25 year old would fall far short of meeting those requirements. This means that the 72q immediate annuity penalty exception is very limited in scope. This explains in further detail:  http://www.bsmg.net/using-a-single-premium-immediate-annuity-to-fund-pre-59-12-income-needs/

 

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