Annuity options in a retirement plan (Our expert tells a reader their options for shifting funds from an annuity.)

What is an issue, though, is your age. If you withdraw money from an annuity prior to age 59 1/2, you are hit with a 10 percent tax penalty on top of the regular income taxes that are due. Which means if you and your wife are in the 25 percent tax bracket, you would end up paying an effective tax rate of 35 percent on your annuity gains if you withdraw the money before you turn 59 1/2. --- There is a way around the 10 percent tax penalty, though: annuitize, that is, convert the value of your annuity into regular payments based, say, on your life expectancy. (The 10 percent tax penalty is also waived on payments you take because you've become totally and permanently disabled and on payments made after the death of the annuity owner.)