Use Annuity like a 72(t) withdrawal?

You are here:
< Back

L1: Use Annuity like a 72(t) withdrawal?I am considering buying a Long Term care policy for my wife and I. Since we are under age 59 _(we are 56),I am exploring ways to pay the annual policy premiums. One option is to buy an annuity today using funds from a qualified IRA.The annuity would then pay the fixed annual premiums for life. My question is, would these distributions be treated the same way as a 72(t) distribution (i.e, no 10% penalty)? It appears to meet the required SEPP requirements, but the pay-out amount each year would violate the IRS max allowable payment based on the current allowable interest rate. I understand the IRS’ intent on limiting the interest rate we can use so we don’t run out of money – butmy annuity is guaranteed for life, so it won’t run out of money at the higher rate.Can I use this strategy to avoidthe 10% penalty for the next few years?2009-06-30 04:52, By: Scott, IP: []
L2: Use Annuity like a 72(t) withdrawal?Scott,
If you are considering an IRA annuity, ie. an SPIA within an IRA account, in order to avoid the 10% penalty, the SPIA payout will have to comply with one of the 3 approved methods described on this site and Notice 2002-62. If the payout is higher, it will not qualify and the penalty will apply. Even though the payout is for life, the regulations do not exempt it. Perhaps there is a way to add enough options to the annuity to bring the payout down to the max allowed by a SEPP. That said, I doubt whether an irrevocable life SPIA purchase is worth it just towaive a 10% penalty for 3.5 years.
If you had taxable funds to purchase an NQ annuity under section 72q, there is special penalty exception in 72q for SPIAs. This is separate from the 72q exception for SEPPs, which is virtually the same as for qualified plan SEPPs under 72t.
One possibility to consider is whether your LT care premiums when added to your other medical expenses exceed 7.5% of your AGI. To the extent exceeded, there is a separate IRA penalty waiver you could claim on Form 5329. You do NOT have to itemize to receive this penalty exception. The IRS publishes an inflation adjusted premium max per person that is banded by ages. This amount is the limit that would qualify for inclusion to determine how much exceeds 7.5% of your AGI.
Another possibility is if either of you are separated from service at age 55 or later and still have a 401k or similar plan with that employer, you can tap that plan without penalty under the age 55 separation exception. Also, if there are highly appreciated NUA shares in the plan, an LSD could be taken, and the stocks sold in a taxable account. These sales are taxed at the LT cap gain rate and are not penalized. The cost basis of the shares in the LSD are also not penalized if the age 55 exception applies.
2009-07-01 00:06, By: Alan S., IP: []

L3: Use Annuity like a 72(t) withdrawal?Alan,
Thank you for some great ideas. I will need to spend some time studying them and discussing them with my insurance company.Thanks again. – Scott2009-07-02 00:44, By: Scott, IP: []