I would like to withdraw my annuity savings account of $13,000. I am only 37 years old, but I am on SSDI. I am told that 20% federal tax will be withheld automatically. I also read that there will be a 10% penalty for early withdrawal, but that I may be eligible for an exemption because of my SSDI. Is that true? I'm also trying to figure out how much additional federal and/or state (Indiana) tax to withheld ahead of time? My wife does make over $100,000 and we file jointly. Will that mean we will pay more taxes?

ANSWER

The BIDaWIZ Team's Answer:

You are correct that there is an exception for avoiding the 10% early withdrawal penalty associated with the annuity. This is referenced in Internal Revenue Code (IRC) Section 72(q)(2)(C) if you are totally and permanently disabled. Is this the case? If so, you need to communicate this to the custodian of the account prior to withdrawal.

In terms of estimating your federal and state tax liability for the withdrawal, we need more information to provide a precise figure. However, below we've provided an estimate based on the fact pattern.

Your AGI 25% Adjusted Gross Income
Withdrawal Amount $13,000
$13,000 * 25% = $3,250 Federal Tax Liability
Please note that since 20% is withheld, you likely will only need to pay the 5% difference.

Indiana state tax is 3.4% of your AGI. If your AGI is ~92,700 after the standard deduction and exemptions, your state tax liability would be $3,152.

References: IRC Section 72(q)(2)(C) & IRS Publication 590
State: Indiana