Annuity Withdrawal Before 59 1/2


D

D.D. Pallmer

Two years ago, my uncle was sold a fixed variable annuity.
It paid some teaser interest rate (the bait that Uncle took)
but now is paying a paltry 3.45%. I cannot move the
investment to an equity sub-account or anything like that.
It's stuck at 3.45%. Buying the product was a mistake but
not of major proportions, but I was not consulted at the
time. Anyway, Uncle recently gifted the annuity to me. Upon
transfer of ownership, the insurance company who wrote it
told me that they would 1099 my uncle (next January) for the
earnings to date. Not very much and Uncle is in a low tax
bracket so this is not a problem. Uncle is 88.

I posted this previously and only had one response that
basically spanked me for transferring this annuity. I fully
understood what was going on. Maybe someone else can address
my tax questions without further spanking. Thank you.

There is a lockup period on the annuity where a big penalty
(from the insurance company, in addition to any tax
penalties) hits if you withdraw. Some of the money recently
became unlocked, so I withdrew it. The rest comes unlocked
in a year. I am 47 years old. A few questions:

1. I assume my basis will be what it was on the day of the
gift, since Uncle will be paying taxes on all earnings thru
that date. (?) 2. What is the penalty for me withdrawing all
or part of the annuity before my own age 59 1/2? And what
form do I report all of this on? And if one is disabled, is
there an exception to the IRS penalty? And if so, what for
do I report THAT on?

It's just a bad investment that I want to close out as
quickly and as cheaply as possible. I think I need to wait
for the "lockup period" to end at the very least. But even
beyond that, what are the implications of all of this?
 
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