How to Cash Out an Annuity: The Full Process

An annuity is a contract with an insurance company where you make payments and receive future disbursements, often for retirement planning. While annuities are designed for long-term income, circumstances may require accessing the accumulated value before scheduled payouts. This process involves specific steps and considerations.

Understanding Your Annuity’s Liquidation Terms

Understanding your annuity contract’s specific terms is fundamental before accessing funds. Annuities vary in structure, influencing liquidation methods. Deferred annuities accumulate funds before payments, while immediate annuities start payments soon after purchase. Fixed annuities offer a guaranteed return, whereas variable annuities’ value fluctuates with underlying investments.

A key contractual term is the surrender period, typically three to ten years. During this time, penalties apply for contract termination or significant withdrawals, allowing the insurer to recover initial expenses. Surrender charges, often a declining percentage, are assessed on withdrawals made during this period. Some contracts permit a penalty-free withdrawal of a small percentage, commonly 10% of the account value annually.

Annuities may include a Market Value Adjustment (MVA), influencing the cash-out value based on interest rate changes since purchase. Rising rates might reduce the surrender value, while falling rates could increase it. The MVA aligns the surrender value with current market conditions and applies when withdrawals exceed allowed amounts during the surrender period.

Cashing out an annuity involves tax implications. Earnings are generally taxed as ordinary income upon withdrawal. For non-qualified annuities (funded with after-tax dollars), the “last-in, first-out” (LIFO) rule applies, taxing earnings before principal. Withdrawals before age 59½ may incur an additional 10% IRS penalty on the taxable portion, unless specific exceptions apply. Qualified annuities (funded with pre-tax dollars) often have the entire distribution taxable.

Preparing Your Annuity Surrender Request

After deciding to surrender an annuity and understanding its terms, prepare the necessary documentation. Obtain the official surrender form from your annuity provider, typically through their online portal, customer service, or mail. This form serves as your formal request to liquidate the annuity.

The surrender form requires specific information for accurate processing. Provide your annuity contract or policy number to identify the account. Include personal details: full legal name, current contact information (address, phone number, email), and Social Security or Taxpayer Identification Number. These details ensure proper attribution and communication.

The form requires instructions for fund disbursement. Specify whether a full surrender or partial withdrawal is desired, along with the exact amount. For direct deposit, provide bank account details (routing and account numbers), often requiring a voided check for verification. If a physical check is preferred, indicate the correct mailing address.

Complete tax withholding elections for federal and state income taxes on the form. This determines how much tax will be withheld from the distribution. Signature requirements vary by provider; some may require a signature guarantee from a bank or credit union. Others may require notarization, especially for substantial amounts, where a notary public verifies identity and witnesses the signature.

Common supporting documentation may be required with the completed form. This could include a government-issued identification, proof of address, or a death certificate for beneficiary surrenders. Ensuring all fields are accurately filled and documents prepared according to provider instructions helps prevent processing delays.

Submitting Your Annuity Surrender Request

After preparing your annuity surrender request, submit the completed forms and required documentation to the annuity provider. Primary submission methods include mailing original documents, uploading scanned copies via a secure online portal, or faxing. Each method has specific recommendations for efficient processing.

When mailing documents, use certified mail with a return receipt for tracking and delivery confirmation. For online submissions, navigate the provider’s secure portal and follow upload prompts, often concluding with an email confirmation. If faxing, retain the fax confirmation sheet.

Upon successful submission, the annuity provider will begin processing the request. Processing time typically ranges from 7 to 15 business days once all complete and accurate paperwork is received. This timeframe may extend if discrepancies or missing information necessitate further communication from the account holder.

Account holders should anticipate communication from the annuity provider after submission. This may include an initial confirmation of receipt. The provider might also reach out if information is unclear or additional documentation is required. Promptly responding to inquiries can help expedite the process.

Receiving Your Annuity Proceeds and Tax Reporting

After your annuity surrender request is processed and approved, you will receive the disbursed proceeds. Annuity funds are typically disbursed via direct deposit into a specified bank account or by a mailed physical check. The timeline for receiving funds ranges from a few business days to several weeks, depending on the provider’s processing and chosen disbursement method.

Tax reporting is a crucial aspect following an annuity surrender. The annuity provider is required to issue IRS Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” for accurate tax filing. This form reports the distribution to both the account holder and the Internal Revenue Service.

Form 1099-R details key distribution information. Box 1 shows the gross distribution. Box 2a indicates the taxable amount, while Box 5 reports the non-taxable amount or cost basis (after-tax contributions). Box 7 contains a distribution code (e.g., “1” for early distribution, “7” for normal distribution), which helps the IRS determine taxability and potential penalties. The taxable portion reported on Form 1099-R must be included as ordinary income for federal income taxes.