Can You Close an Annuity Account?

An annuity represents a financial contract, typically established with an insurance company, designed to provide a steady stream of payments over time. This arrangement can be structured to deliver income for a specific duration or throughout an individual’s lifetime, often serving as a component of retirement planning and managing post-retirement expenses. While annuities are often chosen for their long-term income potential, circumstances can change, leading individuals to consider closing their annuity account.

It is possible to close an annuity account, but this action often involves important considerations. Understanding the contract terms and potential financial consequences is a necessary step before proceeding. The decision to close an annuity should align with an individual’s financial goals, as impacts vary depending on the specific product and timing.

Understanding Your Annuity Contract

Before making any decisions about your annuity, thoroughly review the specific terms of your contract. This document contains all the provisions governing your annuity, and understanding them is crucial for navigating any potential changes.

Within your contract, pay close attention to the surrender period, a specified number of years during which withdrawing funds or closing the annuity may incur penalties. The contract will also detail the surrender charge schedule, showing how these fees decrease over time. Additionally, look for provisions related to Market Value Adjustments (MVAs), which can either increase or decrease your surrender value based on interest rate movements.

It is important to identify any riders or guarantees that are part of your annuity contract. These supplementary benefits can offer additional protections or features, such as guaranteed income benefits or death benefits, which might be forfeited upon closure. If you cannot locate your contract or need clarification on specific terms, contact your annuity provider or a financial advisor. They can provide a copy or explain complex provisions.

Financial Implications of Closing an Annuity

Closing an annuity account before its surrender period expires can lead to several financial consequences, primarily involving fees and taxes. A significant consideration is surrender charges, fees imposed by the insurance company for early withdrawal or termination. These charges are a declining percentage of the amount withdrawn, often starting at 7% to 10% in initial years and gradually decreasing to zero after a set period, commonly six to eight years. The exact calculation and schedule are detailed within your contract.

Another important factor is the Market Value Adjustment (MVA), which can impact the amount you receive upon surrender. An MVA occurs if you surrender a fixed annuity when interest rates have changed significantly since your contract began. If current interest rates are higher than at purchase, your surrender value might be reduced; if rates are lower, your value could increase.

Beyond direct charges, tax implications are a primary concern when surrendering an annuity. Any earnings or gains accumulated are taxed as ordinary income at your regular tax rate upon withdrawal. The original principal investment is generally not taxed when withdrawn, as it was already taxed. If you are under age 59½, any taxable portion may also be subject to an additional 10% federal early withdrawal penalty. It is advisable to consult with a qualified tax professional to understand the precise tax consequences for your individual situation.

Steps to Close an Annuity Account

Once you have thoroughly reviewed your annuity contract and understand the financial implications, the process of closing your account begins by directly contacting your annuity provider. Inform them of your intention to surrender the annuity and request the necessary paperwork. This initial communication is crucial for initiating the formal closure process.

The provider will send you a surrender form, a specific document required to process the termination of your contract. This form will ask for personal identification details, your annuity account number, and explicit instructions for how you wish to receive the disbursed funds, such as a check or direct deposit. Ensure all sections are completed accurately and legibly to avoid delays.

After completing the surrender form, it must be submitted along with any other required documentation. This might include a copy of your government-issued identification, a recent annuity statement, or a voided check for direct deposit setup. Providers often specify acceptable submission methods, such as mail, fax, or secure online portals. Following submission, expect a processing period, which can vary but typically takes several business days or weeks. The provider will confirm the closure and disbursement of your funds once complete.

Alternatives to Full Closure

For individuals considering closing their annuity, several alternatives exist that might better suit their financial needs without incurring the full costs of a complete surrender. One common option is to make partial withdrawals. Many annuity contracts permit penalty-free partial withdrawals, often up to a certain percentage of the account value, such as 10% annually. This allows access to some funds while keeping the remainder of the contract intact.

Another alternative is annuitization, which involves converting the annuity’s accumulated value into a guaranteed stream of regular income payments. This process can be tailored with various payout options, such as payments for a specified period (period certain), for the remainder of your life (life only), or for the lives of you and a beneficiary (joint and survivor). This option fulfills the original purpose of many annuities by providing consistent income without fully liquidating the asset.

A 1035 exchange offers a tax-free transfer of funds from one annuity contract to another, or to a different type of insurance product like a life insurance policy. This allows you to move your money to a new product that might offer more favorable terms, lower fees, or features better aligned with your current goals, without incurring immediate income taxes on the transfer. However, while the exchange itself is tax-free, surrender charges from the original annuity may still apply, and the new annuity will have its own surrender period and terms.

Finally, simply holding the annuity until the surrender period expires can be a prudent choice for some, especially if current surrender charges are substantial. This approach allows the annuity to continue accumulating value and avoids early withdrawal penalties. For those nearing retirement, holding the annuity until annuitization or until they no longer face early withdrawal penalties, such as reaching age 59½, can also be a beneficial strategy.