In which scenario might an annuitant incur an IRS penalty?

An annuitant might incur an IRS penalty primarily when withdrawing funds from their annuity before reaching the age of 59 1/2. This is due to IRS regulations designed to encourage individuals to save for retirement. Early withdrawals from retirement accounts, including annuities, generally trigger a 10% early withdrawal penalty on the amount taken out. This rule applies specifically to distributions from tax-deferred accounts, where the intent is that the funds will grow until retirement age.

The other scenarios mentioned do not incur such penalties under typical circumstances. For instance, canceling a variable annuity might result in other issues, such as surrender charges or loss of benefits, but it doesn't directly trigger an IRS penalty. Selling shares below market value generally pertains to market transactions and individual investment decisions rather than IRS penalties related to retirement accounts. Transferring an annuity to another account, often referred to as a 1035 exchange, is a tax-free event as long as it adheres to IRS guidelines, thus it wouldn't incur a penalty either.