What kind of penalties and/or taxes would I be looking at after taking the entire amount from an annuity held in a qualified IRA last year?

[dj2]

I was older than 59 1/2 when I took the distribution. The annuity was fully annuitized and no surrender charge was imposed by the insurance company. The withholding allowance I chose for the distribution was 10%.

If I'm not mistaken with annuities, a 10% penalty applies to the earnings portion of the withdrawal.  

I'm not sure whether the IRS would assess a penalty on the earnings because they assume that earnings are withdrawn first (and not the original investment).  

I don't know if the IRS can penalize the earnings portion over the 8 years to be fully annuitized by withdrawing the entire amount. It had a Rider with a guaranteed minimum withdrawal benefit (GMWB), but I never received a single payout.

I file yearly. The entire amount of the annuity withdrawn plunged me into a higher tax bracket. Hence the reason for tax owed when filing this year instead of a tax refund.  

After realizing the mistake of not withholding a higher amount last year when I started working on my taxes, this is begging the question now whether the IRS would assess a penalty and or/ taxes.

The program didn't draw any flags when I finished, but I'd like to avoid making another mistake by double checking to be absolutely certain since annuities are such a complex investment.

[dmertz]

Since you were over age 59½ at the time of the distribution, there is no early-distribution penalty.  Since the annuity was in an IRA, the taxation is determined by IRA rules.  The fact that it was an annuity and any details of the annuity are irrelevant.  Simply enter the Form 1099-R into TurboTax and answer the follow-up questions to indicate what you did with the money.  Finally, click the Continue button on the Your 1099-R Entries page and answer any additional questions presented by TurboTax regarding your IRAs.

[dj2]

Thank you for explaining. There was some confusion which had caused concern as I read and misunderstood some IRS publications.

I had basically been concerned about any amount that might be taxable which doesn't represent the portion of the investment in the contract.

The issue of 'taxable earnings' that the IRS publications mention led to some confusion where you have the money invested in the annuity with after tax dollars. I never received a payment under the Rider, but if I would have, a portion of any payment I had received would have been taxable. However, with the entire amount of the contract withdrawn, there was some difficulty piecing together what portion is treated as principal and what is taxable for tax purposes. I was trying to measure paying out more in tax on payments spread out over a period of a lifetime than I would pay in tax by taking one withdrawal. That amount of tax which they would not receive from a surrender is what I had a concern about that the IRS would want to access in a possible penalty/tax.

Then there was a cause for alarm that had to do with an issue of a surrender charge where you cash in the annuity before you start to receive annuity payments which drew some alarm. Of course, the surrender charge is a charge imposed by the insurer, not the IRS. That's why I didn't mention anything about it for that reason and because I was not charged by the insurance company during the time of the withdrawal.

So the entire withdrawal from the qualified annuity contract was used for retirement only and not anything else.  So according to the program, there was tax paid on the income.  I just didn't allow enough withholding last year for that distribution.