Deductibility of an Annuity Penalty

[mpserv]

If a client removes money from an annuity, whether or not it is an IRA, is the penalty imposed by the insurance company deductible? Is this similar to realizing a loss upon distribution of the entire balance of an IRA?

Thanks.

[gkaiseril]

I thought the IRC imposed the 10% penalty for early withdrawal. Since it is a penalty under a federal or state law it is not deductible just like a speeding ticket or parking ticket.

[jainen]

there is a difference

>>whether or not it is an IRA<<

I think there is a difference. Paid from within the IRA, there is no direct tax effect--you are just taxed on whatever you actually receive. Paid from non-IRA funds, it will be an investment expense or early withdrawal penalty depending on what the fee is for.

[DaveO]

The Early surrender charge the issuer charges

Is deductible against the taxable proceeds of the annuity much like a commission on a sale of stock.

I don't have a cite for you but have seen it upheld during an audit.

[Joe Btfsplk]

Penalty by Ins Co

If the penalty is a reduction to the amount paid and is a charge or fee retained by the Insurance Company, it is not an IRS-imposed penalty. Any reduction of this type would reduce the amount received, which, in turn, would reduce the taxable distribution.

[gkaiseril]

Can the OP clearup what the penalty was for?.

If it was from breaking a CD early and paid form taxed funds by the TP, it is deductible from gross income. If the penalty is charged to the tax deferred acount, it is form income exempt from income tax and there is no deduction.

If 5329 IRSC imposed and not deductible.