annuity question

oldgraymareSeptember 26, 2011

I just turned 56 and I retired 2 months ago. I was thinking about putting money into a aarp immediate annuity. I would receive monthly payments starting the next month.I would use Money from a ira that I have. My question is... since I am not 59 1/2, would I have to pay the 10% penalty on the monthly money I receive??? AARP says no but I cant find any concrete answer on this. I would also be pulling out of my 401 to supplement this. I can pull out of my 401 penalty free under the rule of 55 law. AARP charges no fee for this service and the same one at Fidelity charges 2% a yr... which can add up! Thanks for any opinions!!

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I don't think so. You can avoid the early withdrawal penealty for IRAs by taking out what are called "substantially equal periodic payments" for at least five years or until the IRA owner reaches 59 1/2, whichever is later, but a SEPP account wouldn't be the same as a fixed annuity. The IRS-acceptable methods for calculating the amount of the SEPP withdrawal wouldn't give the same result as an insurance company would normally use to calculate a monthly payment on an immediate annuity contract. They are really apples and oranges.

You could set up a SEPP acount to use until you turn 59 1/2 and then use any of the IRA and/or the 401K to fund the immediate annuity. SEPP accounts are very tricky, however, and it would be best to have professional help.

To be honest, I think that's where you should go with this question. The answer I gave is what I think is true, but I'm by no means sure. This is a complex area and you're unlikely to find someone with real expertise on a public forum like this.

    Bookmark   September 27, 2011 at 1:52PM
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