Annuities and Premature Distribution Penalty (IRC CODE SEC. 72(t)(2)) Exceptions

Following is an example of a taxpayer under age 59½ who wanted to take distributions early from a qualified plan. The man in question was a dentist but was unable to practice his profession because of an injury to his right thumb. This injury resulted in significant and irreversible nerve damage. Four insurance companies found he was unable to engage in his regular profession, and that the disability was permanent.

This is a table illustrating today's top interest rates for fixed index annuities. The table lists the name of the insurance company, years that surrender charges would apply, and the premium bonus, if any. To learn more about deferred annuities click any line in the chart or call 800-872-6684 for quick answers.

Fixed Index Annuities

Click here for the complete
Fixed Index Annuity table
Company / Product Surrender Bonus
Midland National LifeSelect Series 1414 yrs.
Midland National LifeMNL Endeavor 1212 yrs.
Fidelity amp Guaranty Performance Pro10 yrs.5.00 %
EquiTrust LifeBuilder Bonus Index9 yrs.6.00 %
Midland National LifeSelect Series 88 yrs.
American General LifePower Index Plus Income7 yrs.
Pacific LifePacific Index Choice 66 yrs.1.50 %

The taxpayer requested a ruling that he was disabled within the meaning of Code Sec. 72(m)(7) and thus exempt from the 10% penalty on premature distributions under Code Sec. 72(t)(2)(A)(iii). The IRS noted that an individual will be considered disabled under Code 72(m)(7) if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.

Since the question of whether an individual is disabled involves a factual determination, IRS concluded that it would not issue a ruling as to whether the taxpayer was disabled within the meaning of Code Sec. 72 (m)(7). IRS Letter Ruling 9621043.Observation: Code Sec.72(m)(7) provides that an individual will not be considered disabled unless he furnished proof of the disability in the form or manner required by the IRS. There is no specific guidance as to what form or in what manner proof must be furnished. Furthermore, IRS has now taken the position that it will not issue a ruling as to whether a taxpayer will be considered disabled. A taxpayer who is claiming to be disabled should thus be prepared to support his claim by medical testimony or other appropriate documentation which can be presented if his claim is challenged.

Do you have questions about annuities? Get help from our friendly and knowledgeable experts, toll-free. Call 800-872-6684 (Monday-Friday, 9AM-5PM EST). We'd be happy to answer your questions without any sales talk. Or, email your questions here and we'll get back to you by the next business day!

____________________

Important Notice: This information is not intended to be a recommendation to purchase an annuity. You should consult with a financial planner to determine if an annuity is a suitable product in your situation. Also, be advised that tax information published at this site is written to support the promotion of annuities. It is based on limited facts and should not be relied upon. You should consult with your own tax and legal advisors for an opinion about what could or should be done in your particular situation.