withdrawal charge

[gman]

Is a withdrawal charge for a retirement account deductible. Taxpayer did a 1035 exchange and was charged a 4,000.0
withdrawal charge. Could he deduct this on Sch A?

[Y2KEA]

If the fee was paid out of pocket it is deductible. If netted from the exchange then no. But $4000? Highway robbery. Yet another reason not to buy a snake oil annuity.

[FEDUKE404]

$4k withdrawal charge

WOW ! That sounds ridiculously high, no matter how "creative" the firms were.

Are you sure that is not partly due to some kind of (broken) contractual agreement or similar related to some of the assets within the account??

A lot of "fine print" reading may become necessary. At best, you might get to toss the charge onto Sch A, miscellaneous deductions, and then deal with AGI issues for deriving any benefit.

FE

[S T]

If a 1035 Exchange that is usually a type of Life Insurance Policy or Annuity. If the client decided to exercise an exchange before the contract maturity date, there are usually "surrender penalties" based on a percentage of the contract and the years the contract has been in place.- it should be noted in the contract paperwork.

To see if any possible deduction you will have to research, type of Insurance Contract and whether it was a Qualifed (IRA) or a non-qualified plan. Generally not deductible if a Qualified (IRA)

Good Luck

Sandy

[ATSMAN]

Several years back there was a company called Mutual Benefit (I am not 100% sure) but my client was charged a surrender charge close to $1200 or $1500 when she switched her contract based on the recommendation of her agent. We took a Misc deduction subject to 2% and IRS disallowed it. We were able to get penalties waived and just paid the tax and accrued interest.

IRS said a Contingent Deferred Sales Charge is not the same thing as a withdrawal penalty imposed by banks. It is a sales charge that the client would have normally paid for purchasing that contract but it was worked backwords when the contract terminated. There would have been no deduction if it was paid on the front end so no deduction at the back end.

So please verify if the penalty you are dealing with is infact CDSC?? Very important distinction.

[Burke]

Is a withdrawal charge for a retirement account deductible. Taxpayer did a 1035 exchange and was charged a 4,000.0
withdrawal charge. Could he deduct this on Sch A?

Well, a "retirement account" could be a lot of things. If it was a 401k, qualified IRA, or SEPP, etc where deductions were taken on the tax return or W-2 (exempt from tax), then no, it is not deductible. If he had basis in a non-qualified annuity, then it falls under the loss rules, if he got back less than he paid in. In a 1035 exchange, a new annuity is purchased and there is no taxable event. If he had basis, it is transferred to the new annuity. No taxable event until that one is surrendered.

[Bees Knees]

But $4000? Highway robbery. Yet another reason not to buy a snake oil annuity.

Maybe yes, maybe no. Some annuities have high fees because they may guarantee income for life, regardless of the current market value. If the $4,000 comes out of principal, but the guaranteed life benefit is based upon the initial contribution plus a minimum annual income guarantee, that means the $4,000 fee only affects what the beneficiaries receive and not what the contract holder receives during his/her lifetime.

In other words, the high fees only affect those who inherit the annuity after the death of the annuitant. If my wife and I don't have any kids and I buy an annuity that pays a guaranteed income benefit over our lifetime, and that income guarantee can only go up and not down, then I couldn't care less about the fees charged against the principal after my wife and I are deceased.

[Burke]

Also, those fees are generally backloaded in decreasing amts until they disappear. Sometimes takes 15 years. But it is to discourage early surrenders, as substantial commissions are paid to the selling agent up front. That's also why new companies often offer a 1% - 10% "bonus" for new policies. It makes up for the surrender charge on the old contract.