Annuity contracts are generally meant to turn a large sum of money into an income stream during your retirement years. However, most annuities will let you withdraw money earlier than you’re scheduled to receive it, with certain caveats.
If you do decide to withdraw money from your annuity ahead of schedule, you’ll likely need to pay penalties and additional taxes. Before you withdraw money from your annuity, make sure you understand the required fees associated with your withdrawal.
Learn more about retirement annuities
What is an annuity withdrawal?
An annuity withdrawal is when you take money from your annuity’s accumulated value.
What should you consider before withdrawing money from your annuity?
Your age, the surrender period, and tax implications will impact your withdrawal and any additional consequences that come with it.
Your age
If you’re younger than 59 ½ years old, withdrawing money from your annuity will have significant tax penalties. You’ll pay a 10% penalty tax on top of any income tax and withdrawal fees. [1]
The surrender period
Your annuity will likely have a surrender period — the amount of time you have to wait before you can withdraw money from your annuity without paying a penalty. If you withdraw money before the surrender period is over, you’ll pay additional fees, outlined in your contract.
“Surrender periods last different lengths of time depending on the exact policy,” says Laura K. Cook, certified financial planner and Founder at Flourish Financial Life Planning. “A surrender period can differ with different products from different carriers; it’s a feature that is unique to each policy.”
Can you lose money from your annuity?
Tax implications
In addition to any tax penalties, your annuity withdrawals may be taxed as income. If you purchased a qualified annuity, any money you withdraw will be taxed as income in the year you withdraw it.
Qualified annuities are paid for with pre-tax earnings, which requires them to be taxed as income upon withdrawal. On the other hand, a non-qualified annuity is purchased with taxed money, so you’re not required to pay income taxes when you withdraw from it.
Learn more about how annuities work
Is it possible to withdraw money from your annuity without incurring a penalty?
If you’re over age 59 ½, the surrender period for your annuity has passed, and you paid from your annuity with taxed funds, you typically won’t have to pay taxes or fees on your withdrawal.
Additionally, if you become disabled or die, your annuity will allow for early withdrawal with no penalty. There are also some contracts that allow you to take penalty-free withdrawals to pay for long-term care expenses. [2]
Most annuity contracts will let you withdraw up to 10% of the contract value every year, without paying a penalty, but make sure this is outlined in your contract before pursuing this option.
While there are rules about how early you can withdraw money from your annuity, there are also rules about how long you can leave money in your contract.
For example, if you have a qualified annuity, you’ll have a required minimum distribution (RDM) starting at age 72 (or age 73 if you reach age 72 after Dec. 31, 2022). If you don’t withdraw the money you’re required to, it could be taxed at 25% of the required amount, on top of getting taxed as ordinary income. [3]
You also can set up a qualified longevity annuity contract (QLAC) to avoid the RDMs. QLAC contracts allow you to wait longer to start collecting an income — and pay taxes on it.
Do annuities affect financial aid & other benefits?
Withdrawing money from your annuity vs. selling your annuity: Key differences
If you need to leverage your annuity for cash, there are multiple ways you can pursue that. An alternative to withdrawing money from your contract is to sell it. Selling your annuity generally results in fewer fees compared to withdrawing money from it.
It’s important to know the different ways you can get money from your annuity and the differences between them.
Are annuities a good investment?
1035 exchanges
Section 1035 of the tax code allows you to make tax-free exchanges of certain insurance products, including annuities. Usually, you don’t have to report a 1035 exchange between products from the same company for tax purposes. [4]
This means that these transfers must occur generally between products of like kind, such as a non-qualified annuity for a non-qualified annuity.
Transferring one annuity for another using a 1035 exchange could help you access more of your contract’s money faster without having to pay taxes and penalties.
A 1035 exchange could also help you acquire a more desirable growth rate for your money. “A 1035 exchange allows you to transfer assets tax-free to another annuity which can provide a more favorable income stream if that's the desired outcome. Especially now that interest rates are elevated, many income annuities are far better than what was previously available even from just a few years ago,” says Sean Rawlings, Founder and Financial Planner at WealthBound Advisors.
What is the impact of interest rate changes on your annuity?
Selling annuity payments
If you’re in a circumstance where you need cash immediately, you can sell some of your future annuity payments in exchange for a lump sum of money right away. If you decide to sell only a portion of your payments, you’ll continue to receive periodic income and retain the tax benefits.
Selling all or some of your future annuity payments may not be ideal, but it could be a cheaper solution than taking a 401(k) loan or IRA withdrawal.
Learn more about the different types of annuities
Is it worth it to withdraw money from your annuity?
Withdrawing money from an annuity is not an ideal option for most people, especially if you’re younger than 59 ½. However, withdrawing money from an annuity can be advantageous if you need cash in the short term and are willing to pay any fees or penalties related to an early withdrawal.
You also need to be willing to accept lesser payments from your annuity in the future. While these can be high financial costs, withdrawing from your annuity may still be your best option.
Can annuities be used as collateral for a loan?
