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Penalty possible for switching annuities

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in Small Business Tax

Q: The annuity I bought a couple of years ago charges high maintenance fees. Will I have to pay any penalties if I withdraw my funds and switch to a different investment with lower fees? C.R., Mt. Pocono, Pa.

A: It depends. Typically, the issuer imposes a surrender fee for withdrawing from an annuity, especially in the early years of ownership. To compound the problem, the IRS assesses a 10 percent penalty tax if you withdraw from an annuity prior to age 59 1/2. But you can at least avoid the penalty tax by swapping one annuity for another annuity tax-free under IRC Section 1035. Conversely, switching to a mutual fund investment won't qualify as a tax-free exchange. Contact the annuity issuer to see what options are available to you.

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