Loans and Tax-Deferred Annuities

Written by Hersh Stern Updated Tuesday, March 17, 2015

annuity risks

A loan is a temporary means of gaining access to the funds in your Tax-Deferred Annuity. Some participants will have emergency situations in which a loan may be necessary. Tax laws permit loans, provided certain restrictions are met. Therefore, it is necessary for the participant to analyze the provisions and charges associated with loans carefully.

General guidelines set forth by the Internal Revenue Service are:

  • certain loans can be treated as taxable distributions if they exceed certain limits set forth
  • most loans must be repaid within five years
  • failure to repay a loan will result in the outstanding amount being immediately subject to taxation
  • if a loan repayment default results in a taxable distribution, insurance companies are required to notify the participant and the IRS about the default
  • if the aggregate of all outstanding loan balances exceed a certain value, the excess is a taxable distribution

Restrictions set forth by individual companies are varied. Most annuity companies restrict loan availability to the Fixed Fund in a Tax-Deferred Annuity. Many companies place limits on the minimum amount that may be borrowed, or the minimum amount that must remain in the account after a loan has been taken. Some companies may activate additional charges once a loan is taken and may charge interest on the amount of the loan outstanding. In addition, many companies will not permit the creation of a second loan until after the repayment of the first loan.

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