Can You Take Money Out of an Annuity?

An annuity is a financial contract between an individual and an insurance company, designed to provide a steady stream of income, often during retirement. Purchasers make either a lump-sum payment or a series of payments to the insurer, who then promises regular payments. While annuities serve as long-term vehicles for financial security and tax-deferred growth, individuals may need to access these funds early. Understanding how to access annuity funds, along with the considerations and procedures, is important.

Methods for Accessing Annuity Funds

Individuals can access their annuity funds in several ways. One method is annuitization, which converts the annuity’s value into a series of guaranteed income payments. These payments can begin immediately (immediate annuity) or at a future date (deferred annuity). Annuitization offers options for payment structures, such as fixed payments or variable payments based on investment performance. The income stream can also be structured to last for a single life or for the joint lives of the owner and another individual, like a spouse.

A lump-sum withdrawal, also called a full surrender, is another way to access funds. This option involves cashing out the entire annuity value in one payment, which terminates the contract. While it provides immediate access to the full cash value, this method can involve significant costs and consequences.

Partial withdrawals allow policyholders to take out portions of their annuity’s value while keeping the contract active. Many contracts include a “free withdrawal” provision, permitting withdrawal of a certain percentage of the contract value annually without surrender charges. This percentage ranges up to 10% of the account value per year. The terms of any withdrawal method are dictated by the individual annuity contract, so reviewing the contract is important.

Key Considerations Before Withdrawing Funds

Accessing annuity funds involves financial and contractual implications. Surrender charges are fees levied by the annuity provider for withdrawals made before a specified period in the early years of the contract. These charges are designed to discourage early withdrawals and can be substantial, often starting around 7% to 10% of the amount withdrawn in the first year. The surrender charge generally decreases over time, by one percentage point each year, until it reaches zero after a period that can range from three to ten years.

Withdrawals from annuities also carry tax implications. Earnings within an annuity grow tax-deferred, meaning taxes are not paid until funds are withdrawn. For non-qualified annuities, funded with after-tax dollars, only the earnings portion is subject to ordinary income tax. The IRS applies a Last-In, First-Out (LIFO) method, so earnings are withdrawn and taxed first. Once all earnings are withdrawn, subsequent distributions of the original principal are tax-free.

For qualified annuities, such as those in an Individual Retirement Account (IRA) or 401(k), all withdrawals are taxed as ordinary income because contributions were made with pre-tax dollars. A 10% early withdrawal penalty may apply to the taxable portion of withdrawals made before age 59½. This penalty is imposed by the IRS under Internal Revenue Code Section 72.

Exceptions to this 10% early withdrawal penalty include withdrawals due to the owner’s death or total and permanent disability, or if payments are structured as substantially equal periodic payments (SEPP) over the individual’s life expectancy. Other exceptions involve distributions for unreimbursed medical expenses exceeding a certain percentage of adjusted gross income, or for qualified birth or adoption expenses. Even if an exception applies to the penalty, withdrawn amounts may still be subject to ordinary income tax.

Any withdrawal, partial or full, reduces the annuity’s contract value. This can diminish future income payments if the annuity is later annuitized. This reduction also impacts death benefits, as these are based on the contract’s accumulated value. Contractual limitations, such as minimum withdrawal amounts or waiting periods, govern access to funds.

Navigating the Withdrawal Process

Withdrawing funds from an annuity involves several steps. First, contact the annuity provider to obtain specific instructions and withdrawal forms. This can be done via phone, email, or their website.

The provider will guide you on the required information and documents. This includes the annuity policy number, personal identification, desired withdrawal amount or method, and bank account details for direct deposit. Some providers may also require information related to tax implications, such as federal income tax withholding preferences.

After obtaining the forms, complete all required sections. Forms need careful review to ensure all fields are filled out correctly. Depending on the provider and withdrawal type, notarization or a signature guarantee may be necessary to authenticate the request.

Once forms are completed and supporting documentation gathered, submit them to the provider. Submission methods include mailing, faxing, or using a secure online portal. Retain copies of all submitted documents for personal records. Processing time can range from a few days to several weeks, depending on the request’s complexity and the provider’s procedures. Funds are disbursed either via direct deposit or by check.