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Know the ins and outs of annuities

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in Small Business Tax

Q. I bought an annuity from my bank’s trust deposit by withdrawing money from a nonparticipating company profit-sharing plan. After I turned 70 1/2 years old, they sent me a distribution for which I had to pay federal tax. But the insurance agent told me that he had located an annuity for my 401(k) that did not require withdrawals after age 70 1/2. I’m still employed by the company. Was the distribution sent to me in error? P.B.W., Grantville, Pa.

A. First, we’re a little confused about whether you bought the annuity with funds inside or outside a qualified retirement plan. It can make a big difference for many retirees.

In general, you must begin distributions from a qualified plan or a traditional IRA in the year after the year in which you turn age 701/2. Thus, if you invested in an annuity or some other vehicle, you must take at least a minimum distribution (calculated under special IRS tables), whether you want to or not.

In comparison, if you invest in an annuity outside of a qualified retirement plan or IRA, you may not have to begin receiving distributions, depending on the annuity’s terms.

Based on your information, it appears that you bought the annuity inside a qualified retirement plan. Normally, you’d be required to take minimum distributions. But you don’t have to begin receiving distributions from a qualified plan if you haven’t retired at age 701/2 (and you don’t own 5 percent or more of the company).

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