Annuities are often pitched as a secure way to generate income in retirement. They promise steady payouts, tax-deferred growth and sometimes even lifetime income.
But what if you need access to your money before your annuity starts paying out? Can you take money out without facing penalties or major losses?
The answer depends on the type of annuity you own, how long you’ve had it and the specific terms of your contract. While some annuities allow withdrawals, they often come with strings attached.
Understanding how annuity withdrawals work is crucial, especially if you’re considering tapping into your funds early. Some withdrawals can trigger hefty surrender charges and tax penalties, and can even impact how much you’ll receive in the future.
If you’re considering pulling money from your annuity, here’s what you need to know.
Can you withdraw money from an annuity?
Yes, in some cases, you can withdraw money from an annuity. But not all annuities are created equal when it comes to liquidity.
Here’s a quick rundown of which annuities allow withdrawals and which ones don’t:
Typically allow withdrawals:
- Fixed annuities: These annuities provide fixed payouts over a set period.
- Indexed annuities: Payouts from this type of annuity are tied, at least in part, to a market index like the S&P 500. This includes fixed index annuities and registered index-linked annuities (RILAs).
- Variable annuities: Payouts from this annuity can fluctuate based on the performance of underlying investments.
Typically don’t allow withdrawals:
- Annuitized contracts: Annuitization takes place after premiums and interest from a deferred annuity are converted into a stream of periodic payments.
- Immediate annuities: These annuities begin paying out within a year after purchasing your contract.
Generally, contracts that have been annuitized — meaning you’ve already begun receiving payouts from the insurer — don’t allow early withdrawals. A good example of this is immediate annuities, which start paying out shortly after purchasing your contract.
Many types of deferred annuities, on the other hand, allow partial withdrawals, but they often come with restrictions.
Surrender periods and surrender charges explained
The biggest roadblock to early withdrawals is the surrender period. A surrender period is the length of time you must wait before you can take money out of your annuity without getting penalized.
Most annuities have a surrender period, and it typically lasts a specific number of years (usually between six and eight). Some annuities also bar you from making any withdrawals during the first year of the contract.
If you withdraw funds during this period, you’ll likely owe a surrender charge, which is a fee calculated as a percentage of the amount you withdraw. These surrender charges are designed to discourage early withdrawals and help insurance companies recoup costs.
Did you know?
While many surrender charges fall within the 5 to 15 percent range, they can be as high as 25 percent.
Surrender charges typically start high and decrease over time. For example, if your annuity has an eight-year surrender period, the charge might be 7 percent in the second year, decreasing by 1 percent each year until it reaches zero.
This means if you withdraw funds in year one, you could lose a significant chunk of your money to fees. Withdraw in year seven and you’ll face a much smaller penalty.
These charges can make early withdrawals costly, but the surrender period doesn’t last forever. Once the period ends, you can usually access your money without facing penalties from the insurance company.
A big caveat to this, though: Some insurers still impose penalties if you withdraw more than the amount allowed in your contract, even after the surrender period is over.
How to withdraw money from an annuity without penalty
Despite surrender periods and potential penalties, there are a couple of ways to take money out of your annuity without triggering extra fees.
Many insurance companies allow you to withdraw a portion of your account value — usually up to 10 percent per year — without paying surrender charges. This free withdrawal amount varies by annuity and insurer, so make sure to check your contract first.
Some annuities also offer crisis waivers, which let you access your funds without penalty in certain situations. You can typically qualify if you experience a major life event, such as being diagnosed with a terminal illness or entering a nursing home. However, not all annuities include these provisions.
You can also avoid penalties by waiting until the surrender period ends. After this period, you may be able to withdraw funds without surrender charges — though other charges, fees or penalties may apply.
Regardless, you’ll need to think about potential tax consequences — you’ll owe a 10 percent early withdrawal fee to the IRS if you take money out before age 59 ½ — as well as the impact to your long-term account value.
What to consider before withdrawing money from an annuity
While it’s possible to withdraw money from an annuity, doing so usually isn’t a good financial move. Before tapping your annuity, here are some things you need to consider:
- Impact on your overall account value
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Withdrawing money reduces your annuity balance, which can forever stunt your future income payouts. If you’re relying on your annuity for retirement income, taking out too much, too soon could leave you with less money down the road — when you’ll likely need it the most.
- Surrender charges
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If your annuity is still within its surrender period, you could face stiff penalties. Make sure you know how much you’ll be charged before making a withdrawal.
- Tax penalties from the IRS
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If you withdraw money from a tax-deferred annuity before age 59 ½, the IRS imposes a 10 percent early withdrawal penalty on your earnings. Withdrawals are taxed as ordinary income, so a significant withdrawal could also push you into a higher tax bracket.
- Alternative options
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If you need cash, consider other sources before accessing your annuity. A personal loan, home equity line of credit, a 401(k) loan or even withdrawing from a different investment account might make more sense. If you’re in a financial bind, talk to a financial advisor to explore alternatives.
Bottom line
Many annuities allow penalty-free withdrawals of up to 10 percent per year, and some offer waivers in certain situations. However, early withdrawals can trigger surrender charges and tax penalties, reducing the amount you keep.
If you’re unsure about whether withdrawing from your annuity is the right move, consider consulting with a financial advisor to weigh your options so you can avoid costly mistakes.
