Withdrawals & Surrenders

Subject to the terms of the contract, partial withdrawals and full surrenders of the value of a deferred annuity are available during the accumulation phase. While this provides the owner or annuitant with access to the funds, it may result in taxes and penalties being assessed.

At Ohio National, most of our annuity contracts allow the owner to withdraw up to 10 percent of the contract value each year without a surrender charge. Surrenders and partial withdrawals in excess of 10% may be subject to a contingent deferred sales charge, which varies from contract to contract. In addition, surrenders and partial withdrawals may be subject to taxation.

• Income Taxes. Partial withdrawals are generally treated as taxable income to the extent that there are earnings in the contract. This means they're first treated as returns of interest earned and second as non-taxable returns of principal. (In the case of a "pre-TEFRA" annuity bought prior to August 14, 1982, partial withdrawals are considered a return of principal first and are not taxable until withdrawals equal the principal paid for the annuity.)

  A complete surrender is taxed under the "cost recovery" rule, which allows investors to receive tax-free returns of principal first, with additional amounts taxed as income.

• Penalty Tax on Premature Withdrawals. Annuities enjoy favorable tax treatment since they are considered long-term investments, primarily for retirement purposes. To avoid their use as tax-favored, short-term investments, a 10% IRS penalty tax is imposed on the portion of any surrender or withdrawal that represents interest earnings, unless the payment is made to an owner who is over age 59 ½, disabled, deceased, or the contract is annuitized over the life expectancy of the owner.

  An Example. In recommending a deferred annuity to a prospect or client, it is important to recognize the longer-term purpose of this contract. A deferred annuity is generally not an appropriate recommendation for shorter-term wealth accumulation needs, as illustrated by the following example.

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