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Re: Does surrendering a whole life policy that was not previously a MEC make it a MEC
The insurance company sent me and the IRS a form 1099-R (Distribution from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts, etc.) showing the gross distribution (box 1), taxable amount (box 2A), and distribution code 1 (box 7) "early distribution, no known exception (under age 59-1/2)".
Marking distribution code 1 in box 7 indicates to the IRS that my gain (the taxable amount in box 2A) is subject to the additonal 10% tax penlaty for early distribution (line 60 of form 1040).
My question is whether what the insurance company put in box 7 is correct?
The letter I got from the insurance company when I surrendered my policy said that the transaction I requested (i.e., surrendering my policy) could result in it becoming a MEC and that if it turned it into a MEC the additional 10% tax penalty would apply since I was less than age 59-1/2. The wording of the letter was fuzzy, but the way the insurance compnay filled out the form 1099-R was not.
I have found information about MECs that discusses the 7 year test and material changes, but nothing that says that surrendering a (whole life) policy automatically makes it a MEC or that surendering a (whole life) policy is a material change that triggers a new 7 year test which results in making it a MEC.
You should get a 1099 from the insurer at year-end which will tell you how much is taxable. The taxable amount must be declared on your Federal Income Tax return.
The insurance company sent me and the IRS a form 1099-R (Distribution from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts, etc.) showing the gross distribution (box 1), taxable amount (box 2A), and distribution code 1 (box 7) "early distribution, no known exception (under age 59-1/2)".
Marking distribution code 1 in box 7 indicates to the IRS that my gain (the taxable amount in box 2A) is subject to the additonal 10% tax penlaty for early distribution (line 60 of form 1040).
My question is whether what the insurance company put in box 7 is correct?
The letter I got from the insurance company when I surrendered my policy said that the transaction I requested (i.e., surrendering my policy) could result in it becoming a MEC and that if it turned it into a MEC the additional 10% tax penalty would apply since I was less than age 59-1/2. The wording of the letter was fuzzy, but the way the insurance compnay filled out the form 1099-R was not.
I have found information about MECs that discusses the 7 year test and material changes, but nothing that says that surrendering a (whole life) policy automatically makes it a MEC or that surendering a (whole life) policy is a material change that triggers a new 7 year test which results in making it a MEC.