Testing the taxation of future annuity withdrawals

[DIY_Tax_Person]

I am wanting to use TurboTax to test out the tax implications of pulling various amounts of money out of a non-qualified variable annuity after I turn 59 1/2. But, I don't know how the various boxes on the 1099 form will be filled out. 1. Gross Distribution, 2a. Taxable amount, 3. Capital gain (included in box 2a), 4. Federal income tax withheld., 7. Distribution code.

So, for example, how would these various boxes look if I were to pull out $10,000?

I'm paying about an extra 0.7% per year in fees by having my money sit in my TransAmerica variable annuity (versus low cost ETFs).  That's 6.8% in fees over 10 years. Obviously the more I take out, the higher my taxes. So, I'm testing the tax implications of taking it all out over 3 years, 5 years, etc.

[Anonymous_]

@dmertz  can almost certainly answer this.

[Critter-3 · Accepted solution]

1. Gross Distribution,  10,000

 2a. Taxable amount,  tbd by the annuity ... it will be a portion of box 1

3. Capital gain (included in box 2a),  zero  

4. Federal income tax withheld.,  tbd ... usually your choice or a flat 10% or 20%

7. Distribution code.  7

[dmertz · Accepted solution]

For nonperiodic distributions (not annuitized), distributions come first from the investment gains in the annuity and those gains are taxable as ordinary income.  Only after all of the gains are distributed do distributions become nontaxable returns of your investment in the contract.  Because of this it can be difficult to work your way out of the annuity to get down to your investment in the contract without doing so at a higher marginal tax rate than you might have with smaller distributions, which I'm sure is why you want to try different scenarios.

On the Form 1099-R, the gross amount distributed will appear in box 1.  Box 2a will show the lesser of the amount in box 1 and the amount of gains in the account at the time of the distribution, so if no more than the gains is distributed, box 2a will be the same as box 1.  Because you are over age 59½, box 7 will have codes 7 and D.  Box 3 does not apply to this distribution, so it will be blank.  Box 4 will have whatever amount you ask to be withheld withheld for federal taxes which can be $0, 10%, or more than 10% of the taxable amount.

Also be aware of any surrender charges the might apply if you haven't had the annuity long enough for the surrender charges to no longer apply.