Can I Take Money Out of My Annuity?

An annuity is a contract established with an insurance company designed to provide future income payments. While typically structured for long-term financial planning, circumstances may arise where accessing accumulated funds becomes necessary. Understanding the various ways to withdraw money from an annuity is important, as each method carries distinct implications for how and when funds are received.

Accessing Annuity Funds: Methods and Options

Annuity contract holders can access their accumulated funds through several distinct methods, each serving different financial needs and long-term goals. These options range from converting the annuity into a steady income stream, withdrawing portions of the balance, or cashing out the entire contract. The choice of method depends on factors such as the immediate need for funds and the desire to maintain the annuity’s future income potential.

One primary method for accessing annuity funds is through annuitization, which converts the accumulated value into a series of regular income payments. This process can be structured as an immediate annuity, where payments begin shortly after a lump-sum investment, or a deferred annuity, where payments start at a future date, such as retirement. Annuitization offers various payout options to suit different needs, including a “life only” option that provides payments for the annuitant’s lifetime, ceasing upon death. A “life with period certain” option guarantees payments for the annuitant’s life or a specified period, whichever is longer, with beneficiaries receiving payments if the annuitant passes away before the period ends. A “joint and survivor” option extends payments over the lifetimes of two individuals, often a spouse, though typically at a reduced amount compared to a single-life option.

Another common approach is taking partial withdrawals from the annuity’s accumulated value without fully surrendering the contract. Many deferred annuity contracts include a “free withdrawal” provision, allowing policyholders to withdraw a certain percentage, often up to 10% of the contract value, annually without incurring surrender charges. Withdrawals exceeding this penalty-free amount may be subject to surrender charges, which are fees imposed by the insurance company for early access to funds, typically decreasing over several years. Some annuities also permit systematic withdrawals, where the owner specifies the amount and frequency of payments until the funds are exhausted, offering a flexible way to receive regular income without full annuitization.

The third option is a full surrender of the annuity, which involves cashing out the entire remaining value of the contract. This action terminates the annuity contract and provides the owner with a lump sum. A full surrender often results in surrender charges if it occurs during the contract’s surrender period. While it offers immediate access to all funds, it also forfeits any future benefits or guarantees the annuity might have provided.

Taxation and Penalties on Annuity Withdrawals

Annuity withdrawals have specific tax implications and potential penalties. Tax treatment depends on whether the annuity is qualified or non-qualified, and if principal or earnings are withdrawn. Earnings are generally taxed as ordinary income, and timing impacts the amount owed.

Earnings accumulated within an annuity are typically taxed as ordinary income when withdrawn, subject to the individual’s regular income tax rates. For non-qualified annuities, funded with after-tax dollars, only the earnings portion of withdrawals is taxable; original contributions are tax-free. The Last-In, First-Out (LIFO) rule applies to non-qualified annuities during accumulation, meaning earnings are withdrawn first and are taxable until depleted. Subsequent withdrawals are a tax-exempt return of principal. Qualified annuities, funded with pre-tax dollars (e.g., IRAs, 401(k)s), are generally fully taxable as ordinary income.

Beyond ordinary income tax, withdrawals made from an annuity before the owner reaches age 59½ may be subject to an additional 10% federal early withdrawal penalty, imposed by the Internal Revenue Service (IRS) under Internal Revenue Code Section 72. This penalty applies to the taxable portion of the withdrawal, in addition to any regular income taxes due.

However, several exceptions can allow individuals to avoid the 10% early withdrawal penalty, including:
Withdrawals due to the owner’s death.
If the owner becomes totally and permanently disabled.
Payments made as part of a series of substantially equal periodic payments (SEPPs) over the owner’s life expectancy or joint life expectancies.
Certain unreimbursed medical expenses.
Qualified higher education expenses.
Qualified birth or adoption distributions.

Preparing Your Withdrawal Request

Careful preparation is needed for annuity withdrawals. Gathering necessary information and understanding policy details before contacting the provider streamlines the request, avoiding delays and aligning with financial goals.

First, collect pertinent policy information, including:
Annuity contract number.
Owner’s full legal name.
Social security number.
Current contact details (address, phone number).
Having these details helps the provider identify the account and verify ownership.

Review the annuity contract thoroughly. It outlines terms, conditions, and applicable surrender charges. Understanding these provisions helps anticipate potential fees or limitations and ensures the withdrawal method aligns with the contract.

Determine the precise withdrawal details: partial withdrawal, full surrender, or annuitization. For partial withdrawals, specify the exact dollar amount or percentage. If direct deposit is preferred, compile accurate bank account information (bank name, account number, routing number).

Consider tax withholding preferences for federal and state income taxes. Withdrawal forms include sections for indicating desired withholding. While 10% federal withholding is common, individuals can elect a different amount or no withholding, remaining responsible for taxes due and potential penalties. With this information ready, contact the provider or a financial advisor for specific withdrawal forms and instructions.

Submitting Your Annuity Withdrawal

After gathering information and determining withdrawal details, formally submit the request to the annuity provider. This ensures the provider has documentation to process the withdrawal efficiently and securely. Submission methods and processing times vary by institution.

Withdrawal forms and supporting documentation can be submitted through various channels, including:
Mailing completed forms to the provider’s designated address.
Sending them via fax.
Utilizing secure online portals, if offered.
A financial advisor can also assist with submission.

Upon receipt, the provider verifies the request’s authenticity and owner’s identity. This may involve validating signatures, especially for larger amounts or recent address changes. Some providers may require original signatures for security.

Processing time for annuity withdrawals varies, from a few business days to several weeks. Factors include withdrawal complexity (partial vs. full surrender) and the provider’s internal schedules. Funds are disbursed according to the chosen method, such as direct deposit or mailed check.

After processing and disbursement, the annuity owner should receive confirmation. In the subsequent tax year, individuals receiving $10 or more from their annuity will receive IRS Form 1099-R. This form reports the gross distribution, taxable amount, and any tax withheld, essential for accurate tax reporting. Contact the payer immediately if discrepancies are noted on the 1099-R.