How to Cash Out an Annuity: Process and Financial Costs

An annuity is a financial contract, typically established with an insurance company, designed to provide a steady stream of income, often during retirement. Individuals pay premiums, either as a lump sum or over time, and in return, the insurer commits to making regular payments back to the owner at a later date. While these contracts are primarily intended for long-term financial security, circumstances sometimes arise where individuals need to access their funds sooner. This early access, commonly referred to as “cashing out,” involves specific processes and financial considerations.

What is Full Annuity Surrender

A full annuity surrender involves completely terminating the contract with the issuing insurance company before it has fully paid out or before the income-paying phase begins. Upon surrender, the contract is dissolved, and the remaining cash value, after any applicable charges, is returned to the owner.

People consider a full surrender for various reasons, often driven by an immediate need for a lump sum of money. This could be due to unexpected medical expenses, a significant change in financial goals, or dissatisfaction with the annuity’s performance. The decision to surrender means foregoing the long-term income stream and other guarantees the annuity was designed to provide.

Costs and Tax Consequences

Surrendering an annuity incurs surrender charges imposed by the insurance company for early withdrawal. These charges typically decline over a set period, often five to ten years, starting high (e.g., 7-8% in the first year) and decreasing annually to 0%. Some contracts allow a penalty-free withdrawal of up to 10% of the account value each year.

The earnings portion of the annuity, which is the difference between the amount received upon surrender and the total premiums paid, is generally subject to taxation. This gain is typically taxed as ordinary income, at the individual’s regular income tax rate, rather than at capital gains rates. The initial premium payments are considered a return of principal and are not taxed upon withdrawal.

An additional tax penalty may apply if funds are withdrawn before age 59½. The IRS imposes a 10% additional tax on the taxable portion of early withdrawals, as outlined in IRS Code Section 72. This penalty is separate from any surrender charges. Exceptions to this 10% penalty include distributions due to the owner’s death or disability, or those part of a series of substantially equal periodic payments (SEPP) that continue for the longer of five years or until the owner reaches age 59½.

Beyond these direct financial costs, surrendering an annuity means forfeiting future benefits and guarantees, such as guaranteed income streams, death benefits, and living benefits. Their forfeiture can have lasting implications for retirement planning. Consulting with a qualified financial advisor and tax professional is advisable before making any surrender decisions.

Steps to Surrender Your Annuity

Initiating a full annuity surrender begins with contacting the annuity provider directly. Policyholders can reach out to the insurance company’s customer service department or their agent to express their intent and request the necessary forms. This initial contact helps understand specific requirements.

The provider typically requires specific documentation to process the surrender. This commonly includes:
A completed surrender request form
A copy of valid identification
A voided check for direct deposit
Relevant tax forms, such as a W-9

Carefully following all instructions helps prevent delays.

Once all required forms and supporting documents are gathered, submit them to the annuity provider. Submission methods vary, including mail, fax, or online portals. Retain copies of all submitted paperwork for personal records. Processing time often takes around 30 days, though structured settlements might require 45 to 90 days due to additional approval. Following submission, expect confirmation of receipt and notification regarding fund disbursement.

Alternative Ways to Access Annuity Funds

While a full surrender provides a lump sum, other methods exist for accessing annuity funds that may be less impactful financially. A common alternative is a partial withdrawal, where a portion of the cash value is taken out while the remainder stays within the contract. This allows the annuity to continue growing and retain some benefits. Partial withdrawals are subject to pro-rata taxation of gains and the 10% early withdrawal penalty if taken before age 59½. Many contracts permit up to 10% of the account value to be withdrawn annually without surrender charges.

For deferred annuities, annuitization converts the accumulated lump sum into a guaranteed stream of income payments. This process can begin immediately or at a deferred date, providing a steady income flow for a specified period or the annuitant’s life. Payout options include “life only” or “period certain,” which guarantees payments for a minimum number of years.

Another method is selling future annuity payments to a third-party company on the secondary market, known as annuity factoring. This allows the annuity holder to receive a lump sum in exchange for future payments. However, individuals typically receive less than the full value due to the discount applied. For structured settlements, court approval is often required.