Discussion:Penalty on Dist from Insurance Contract
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Discussion Forum Index --> Tax Questions --> Penalty on Dist from Insurance Contract
| 28 August 2008 | |
| I have a client who recieved a dist from an insurance annuity contract. He claims that it is not subject to the 10% penalty because it is NOT a MEC (Modified Endowment Contract). Does anyone know the answer to this?
Thanks, PJ | |
| 28 August 2008 | |
| 1) Please fill out your profile
2) How old is the taxpayer? 3) Was this a qualified or NQ annuity contract? | |
| 28 August 2008 | |
| by the way, MEC rules apply to an insurance contract, not an annuity | |
| 28 August 2008 | |
| I guess you've got to first identify whether this is from an insurance contract, as your title question posits, or an annuity, as the question in your first post leads us to believe. Different answers will apply. | |
| 28 August 2008 | |
| from my user talk page:
Upon further review, it was an insurance contract, and it was NOT part of a Qualified Plan, just a whole life insurance contract. This client is a CFP and he says his district director told him the distribution is NOT subject to the 10% penalty. I am not able to confirm that with my reading of the tax code. Can you lead me in the right direction? Thanks for your help, | |
| 28 August 2008 | |
| 'distributions' (or more correctly, cash withdrawals) from cash value life contracts are [edit: often] treated as a return of basis up to the cumulative amount of premium paid in, then a policy loan of the cash value.
gain will come from the policy if it lapses (or is surrendered) and the policyholder has taken out (or receives) more than basis IRC ยง72 and Treas Reg 1.72-11 | |
| 28 August 2008 | |
| anyways, not subject to the 10% penalty, even though it is reported on a 1099-R. It would be nice if there was a box to check 'Life Insurance Contract' so that we wouldn't get it confused with an annuity. | |
| August 28, 2008 | |
| Withdrawals are withdrawals and loans are loans. You can't treat a withdrawal as a loan just because you have no basis. | |
| 28 August 2008 | |
| (read a policy LH - it's standard verbage in [edit: many] contracts issued in the US for the last 25 years or so. It's not me saying it, it's the policy agreement that makes it so.) | |
| August 28, 2008 | |
| I have read many policies. Shall I start quoting?
In the vast majority of policies currently being issued, there is a right to take withdrawals and a right to take loans. They have different tax consequences and different non-tax consequences. It is often a severe mistake to take withdrawals rather than loans despite basis (as you will owe premium tax if you restore the withdrawal), and often a mistake to take loans without (if they are costly under the policy). I would never buy a policy that didn't give me the choice. | |
| 28 August 2008 | |
| OK, but this was taken as a withdrawal in this example, not a loan. | |
