Fixed Annuity Tax Query?

Join Our Mailing List

Dear Medical Executive-Post,

I purchased a fixed contract annuity for $50,000 in 2004.

This was a guaranteed principle annuity with MetLife. I used money from a CD. This was not an IRA. I withdrew interest monthly and withdrew the allowed 10% per year.

In January 2007, the interest was so low (2%), that I decided to withdraw all funds. I was charged a 6% early withdrawal penalty (approx. $2,300).

  • How is this treated for taxes?
  • Early withdrawal penalty on Line 33?
  • Loss on investment?

This does not show on the 1099, but it is on the remittance advice.

Thank you.

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)


One Response

  1. Linda,

    Based on the information you provided it appears that you might be able to claim a loss on your tax returns. I am assuming the following:

    * Initial Investment: $50,000.00
    * Surrender: $2,300.00 (approximately)
    * Surrender Value $38,333.50 (approx $38,333.50 x 6% penalty = $2,300.01)

    Annuities have a ten percent penalty on early withdraw before the age of 591/2; however, this only applies to gains. You cannot deduct your penalty paid on the annuity of $2,300.00 as a realized loss. Your accountant may have you deduct the loss of $11,666.50 (approx) since you completely surrendered the annuity.

    First, your accountant may include the loss as a miscellaneous item by itemizing the deduction on your schedule A of your tax return. The loss will be subject to 2% of your adjusted gross income and may be subject to Alternative Minimum Tax.

    Second, your accountant may have the loss considered an ordinary loss during the current year while entering into a transaction for profit. This full loss could be deducted without AMT issues.

    However, please be advised that the IRS Ruling 61-201 provides minimal amount of authority regarding the losses of the annuity to be acceptable as ordinary loss. It is strongly recommended that you seek the advice of your tax consultant since this can be questioned by the IRS. Unfortunately, the IRS has not provided proper guidance on how to deduct losses from annuities.

    Good luck!
    -Amaury Cifuentes, CFP®


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: