by John Darer CLU ChFC MSSC CeFTRSP CLTC
"Do Structured Settlements Have a Penalty For Early Withdrawal? "
It's a trick question if I were to ask it to a settlement planner. Here's why…
The requirements of Internal Revenue Code Section 130, and its embodiment in language in settlement agreements, essentially provide that you cannot withdraw money from a structured settlement. Therefore in the strictest sense, there can be no penalty for an early withdrawal.
I believe however, that the Yahoo user who inquired, was struck by initial interest confusion and was referring to a structured settlement factoring transaction (structured settlement "cash now" transaction) or . In a structured settlement factoring transaction there is a transfer, or sale, of structured settlement payment rights (i.e. the right to receive structured settlement payments). These transfers, which are at a reduced percentage of the present (not future) value of the transferred future payments, must be approved by a Court in your state or the purchaser will have to pay a 40% excise tax.* Some may consider it a "withdrawal penalty" but it is not technically accurate.
*See IRC 5891
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