Modified Endowment Contract Withdrawals
Description
How to fill out Checklist For Modifying Or Extending And Existing Contract?
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FAQ
For example, MECs can function as an alternative or supplement to annuities in your retirement and estate planning. Like annuities, you can withdraw money in retirement with the earnings treated as ordinary income.
Under a modified endowment contract, the gains are withdrawn first, which are taxed as ordinary income. MEC withdrawals also typically incur a 10% tax penalty if you take out the money before turning 59½ years old.
Withdrawals are taxed similarly to those of a non-qualified annuity. For withdrawals before the age of 59½, a penalty of 10% may apply. 6 As with traditional life insurance policies, MEC death benefits aren't subject to taxation.
Withdrawing money from a modified endowment contract is similar to withdrawing from a non-qualified annuity, which is funded with post-tax dollars. When you take money out of your MEC, the earnings are taxable as ordinary income before you turn 59 ½ and you also incur a 10% penalty.
Like nonqualified annuities, MECs act as investment products that are funded with after-tax dollars. When you take money out of an MEC, you only need to pay taxes on the earnings you receive. The IRS treats this money as ordinary income.
