With a deferred fixed annuity, most people will start investing at early ages. Therefore, most people will input a substantial amount of their income in such schemes. The annuity insurance firms do not place any limit for investors. This gives people the freedom to place as much money as they would like to invest in such investments. It would be very painful if a huge IRS penalty were imposed on your account because it would lead to the loss of the money that you worked very hard to get.

Three different scenarios that would result in such penalties are listed below. The first one is the withdrawal of your investment as a lump sum after you retire. Even though your annuity contract could be mature for you to make the withdrawal, a fifth of your payments are usually taken. This amount takes care of any federal taxes that you might be required to pay. However, there are situations that might lead to more amounts being taken from you. These situations are determined by an individual’s tax bracket. The money is taken because the annuity is considered your source of income since you are not working. However, you can avoid these penalties.

All that you need to do is to directly rollover your IRA account. In this case, you will not come into contact with the money that you are transferring. Therefore, you will not be taxed in any way.

Another reason that leads to high penalties within fixed annuity investments is the premature termination of a contract. For this retirement plan, it is not possible to end a contract between you and an insurer during the accumulation period. If you have to do it, then you have to pay a huge penalty. That is inconvenient because the process will reduce your money greatly. The best way to avoid these losses is to refrain from prematurely terminating your annuity contract.

The third reason that could lead to unnecessary fines being imposed on you is withdrawing money during the accumulation period of your fixed annuity. Therefore, how can you avoid such penalties? There are many ways of doing that. One, there is always a maximum annual amount that you can withdraw from your account. You should find out this value and then make sure that you do not exceed the stated amount. However, there are the situations that arise and you have to withdraw more money than this maximum allowable tax-free withdrawal.

You can take advantage of the exceptions set aside for such huge withdrawals. The first option involves the taking of a short-term loan from this investment. Therefore, you have to visit your investment’s custodian and discuss on your needs. When the insurer agrees to such a request, you are required to return the money the soonest possible, which should be a period not exceeding 60 days. Otherwise, you might find yourself being taxed because of the delay.

A second exception is that you can pay the fees for a tertiary institution either for yourself or for a dependant. However, the only catch is to have a proof that the person attending the college has actually qualified to join the institution. Know that this person should not be benefitting from a scholarship or any other tax-free aid.

Finally, if you want to buy your first house, you can use the money that you have invested in an annuity without facing any tax penalty.