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Nov. 14, 2007
When calculating the portion of a surrendered annuity that will be subject to income taxes and the 10 percent penalty, is the surrender charge of the insurance company used in the calculation?
For example if a person put $30,000 into an annuity and its value is now $35,000 with a surrender charge of $2,000 (meaning the payout from the insurance company is $33,000), will you be taxed and penalized on a gain of $5,000 or $3,000?
Jon, New York
Dear Jon,
According to Deborah Tucker, a spokesperson for the National Association for Variable Annuities, if you make a full withdrawal from the annuity, your income taxes and 10 percent penalty would be based on the value after surrender fees.
Using your example, you would be taxed and penalized based on a gain of $3,000 for surrendering that annuity. For more information, read Getting out of your annuity.
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Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.
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