early distribution from non-qualified annuity jointly owned by spouse

[cheleedo]

We got an early distribution from a non-qualified annuity jointly owned - wife is <59.5 and husband is >59.5. 1099-R came with wife's SSN and distribution code 1D.  We took an early withdrawal with no penalty up to 5% as per contract - they didn't say we would have a tax penalty.  Do we really owe 10% tax penalty for the entire amount when the husband is >59.5?

[DianeW777]

No, you do not owe the 10% penalty because your wife is at least 59 1/2 years of age when the nonqualified distribution was taken out. I mention her because you said the distribution came in only her name and social security number (SSN). As you complete your Form 1099-R you should see the following screens.  Make sure you enter the amount taken out after reaching the age.

• Search (upper right) for 1099r > click the Jump to... link continue to review your entry and look for the screens below.  
• Also double check the age and dates of birth under 'My Info' in the menu tree left

[cheleedo]

I think you misread the question - wife is younger than 59.5 and husband is over 59.5 but the 1099r came in wife's name/ssn - so it is saying we have to pay the 10% penalty on the withdrawal from this joint account.

is the entire amount subject to the penalty? or half the amount? or none?

[DMarkM1]

Only the interest and earnings on your wife's portion of the distribution from a non-qualified joint annuity would be subject to the 10% early withdrawal penalty.  

Two items at play here.  Typically each 1099R for a distribution from a joint annuity is prorated by the ownership percentage (usually 50% for spouses).  You should verify with your plan administrator.  

Second, for a non-qualified annuity only the earnings/interest distributed would be taxable and penalized for the early withdrawal.  Box 2 on the 1099R should reflect this.  Box 5 should also have an amount as per the instructions for form 1099R (see below).  

Generally, for qualified plans, section 403(b) plans, and nonqualified commercial annuities, enter in box 5 the employee contributions or insurance premiums recovered tax free during the year based on the method you used to determine the taxable amount to be entered in box 2a.

[cheleedo]

Thanks, but the 1099r is for the full amount and in my wife's name/ssn. How do we enter it in turbotax so that only 50% is charged the 10% penalty? The entire amount is from interest/gains as this is a post-tefra account.

[ShirlynW]

@DMarkM1 is giving good advice, only the wife’s 50% portion of the earnings would be subject to the early withdrawal penalty. I suggest having the company to issue a 1099R to each joint owner on a pro-rated basis. This would result in the wife’s 50% of the earnings being subject to the early withdrawal penalty.

[cheleedo]

Thanks but the company refuses to reissue separate 1099Rs.  I think maybe we need form 5329 and enter half the amount as other - not subject to additional tax. Do you think that's right?

[DanaB27 · Accepted solution]

Yes, you can enter half the amount under “Other Reasons” on the “These Situations May Lower Your Tax Bill” screen as Tax Expert DianeW777 mentioned. This would create Form 5329 and show that half of the distribution amount meets the penalty exception. After you enter all your Form 1099-R click "Continue" to get to the “These Situations May Lower Your Tax Bill” screen.

@cheleedo