Annuity withdrawal

[HavasuFlash]

I took a $10,000 early withdrawal on my Annuity.  In two years I have made just slightly over $2000 in interest yet box 2a on my 1099R says of the $10000 withdrawn, $1375 is taxable.  How can it be so high?

[DanaB27]

The amount you pay in taxes depends on whether you bought the annuity with pre-tax or post-tax funds.

If you purchase an annuity with pre-tax funds, the money you withdraw will be taxed as income.

If you use post-tax funds to buy the annuity you’ll only pay taxes on the earnings (please see this excellent post from Tax Expert DianeW777 for additional information).

[HavasuFlash]

Thanks so much Dana....the annuity was purchased with taxable dollars....it is a $100000 tax deferred annuity......have only made a little over $2000 since purchase so am confused why I'm they are saying $1375 is taxable income when I only withdrew $10000.  Thanks again for your wonderful assistance.

[JulieS]

What you are describing is a non-qualified annuity. Annuity companies are required to distribute all of your earnings first and show those earnings as taxable. The non-taxable portion represents a return of your after tax investment. 

[HavasuFlash]

Thank you so much Julie.....3 thumbs up.

[dmertz]

I assume that this is a distribution from a nonqualified annuity (codes 1 and D in box 7 of the Form 1099-R).  If you previously took no distributions from this annuity, I would have expected the taxable amount to be slightly over $2,000, the entire amount of interest earned.  As JulieS said, non-periodic distributions from a nonqualified annuities come first from investment gains.  Only after all of the gains present in the account have been distributed do the distributions include a portion of your investment in the contract.

Periodic (annuitized) distributions are different in that they include only part of your gains.

[HavasuFlash]

Thank you dmertz......wonderful explanation....

[MtnTABS]

In June, 2023, I inherited a non-qualified annuity from my cousin who was 10.5 yrs. younger than I. I am 76. In order to incur the least amount of tax, on my Death Benefit Claim Form I chose the Option G- Stretch (Life Expectancy) Distribution. I was told by the annuity company that my life expectancy was 14.1 years. Beginning in Sept., 2023, I received a monthly check for the last four months of the year. I specifically asked and was told that my Cost Basis was $16,670.01. The earnings brought the value I inherited to $33,770.33.

I was told by the annuity company and the broker that the rule is Last In, First Out (LIFO). I pay quarterly tax estimates so I increased my 4th quarter estimate by 30% of the total annuity received for 2023.  My 1099-R shows $2,394.25 in Boxes 1 and 2a, the amount I received. Box 7 shows 4D. My question is: Is there any reason that I have to file General Rule or can I just enter the 1099-R numbers and ignore it? I do not believe I am eligible for General Rule and certainly don’t want the hassle! My thinking is that in about 7 years I will be down to my Cost Basis and then my monthly payments will be non-taxable. 

Thank you so much. I have researched this for hours but since I use TurboTax each year, this Community Forum has come the closest to my situation and I just need clarification. 

[DianeW777]

It doesn't really work like that.  The cost basis is being distributed little by little as the annuity is disbursed to you. The annuity company should be entering a different taxable amount from the gross amount, but if not then you should use the 'general rule'.  The life expectancy tables are in IRS Publication 939, and the computation.  You have all the numbers to enter in your tax return (cost, starting date, expected return).

• Step 1. - Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. 
• Step 2. -Figure your expected return.
• Step 3. -Divide Step 1 by Step 2 and round to three decimal places. This will give you the exclusion percentage.
• Step 4. -Multiply the exclusion percentage by the first regular periodic payment. The result is the tax-free part of each pension or annuity payment.

If you choose not to use the 'general rule' then you will likely pay tax on all of the annuity each year, indefinitely.

@MtnTABS 

[MtnTABS]

Thank you, Diane. I triple-checked with the company that distributes the monthly annuity payment; I spoke with the broker who sold the annuity to my cousin (deceased), and he called the company. Everyone says that the earnings are being distributed to me until I reach my Cost Basis. The Cost Basis quoted to me in Sept., 2023 by the company is the same figure the broker quoted to me last Friday in an email. I did not fill out a General Rule and went ahead and E-Filed Federal. I actually inherited three other non-qualified annuities from my cousin so I guess I could file an amended return…….  I have to say I read all the advice about annuities on the Community Board and several times I read that if the amount in Box 2 is the same as Box 1, taxes are owed on the full amount. ?.??

[AmyC]

Box 1 is the amount received. Box 2 is the taxable amount. Therefore, if the boxes match, it is all taxable. So, if the company said that you are receiving interest earned until you reach the cost basis, it would be taxable withdrawals until then.

The cost basis does not change. The amount originally paid for the annuity does not change. Only the value and the earnings will change.

Since you have filed with the 1099-R as it came and are ignoring the general rule for the reasons you listed, you have a working game plan. Enjoy the year!

@MtnTABS