How to Get Money From Your Annuity: Rules and Options
Navigate the process of withdrawing funds from your annuity. Explore payout choices, key financial impacts, and practical steps for accessing your money.
Annuities are financial contracts issued by insurance companies, designed to provide a steady income stream, often during retirement. Individuals purchase annuities with a lump-sum payment or a series of payments. Funds within the annuity grow on a tax-deferred basis, with taxes due only upon withdrawal. This guide details methods for withdrawing money from an annuity, financial implications, and steps to request funds.
Annuity Payout Options
Several payout options are available when accessing annuity funds, each structured to meet different financial needs. Annuitization converts the annuity’s value into a guaranteed stream of periodic payments. These payments can last for a specified period or the annuitant’s life. Options include “life only,” providing payments for the annuitant’s lifetime, ceasing upon death. “Life with period certain” guarantees payments for life, but if the annuitant dies before a chosen period (e.g., 10 or 20 years) ends, payments continue to a beneficiary for the remainder of that period. “Joint and survivor” annuitization provides payments for two individuals’ lives, typically spouses, continuing to the survivor after the first annuitant’s death, often at a reduced amount.
A lump sum withdrawal allows taking the entire remaining contract value at once. This option is available at the annuity’s maturity or upon surrender. While providing immediate access, it can lead to significant tax implications, as all accumulated earnings become taxable in the year of withdrawal.
Partial withdrawals allow individuals to take specific amounts periodically while leaving the remaining contract value invested. This method helps manage cash flow without fully depleting the annuity’s value. However, such withdrawals may reduce the annuity’s overall value and affect future growth or guaranteed benefits.
A systematic withdrawal plan involves regular, fixed payments over a specified period or until funds are depleted, without fully annuitizing the contract. This provides a consistent income stream similar to annuitization but offers more flexibility, as the contract remains intact. Unlike annuitization, systematic withdrawals do not guarantee lifelong payments.
Important Considerations for Accessing Funds
Accessing annuity funds involves several financial and contractual factors that impact the net amount received. Surrender charges are fees imposed by the insurance company if funds are withdrawn too early. These charges apply during an initial period, often three to ten years after purchase. Surrender charges are usually a declining percentage of the amount withdrawn, decreasing to zero by the end of the surrender period.
Tax implications are another consideration, as annuity earnings grow on a tax-deferred basis. When withdrawals are made, earnings become taxable as ordinary income. For non-qualified annuities (funded with after-tax money), the “last-in, first-out” (LIFO) rule applies: earnings are withdrawn first and are fully taxable until depleted. Subsequent withdrawals are a tax-free return of the original principal.
An additional 10% federal tax penalty may apply to taxable withdrawals made before age 59½, unless an exception applies. Exceptions include withdrawals due to total disability, substantially equal periodic payments (SEPPs), or certain unreimbursed medical expenses. For qualified annuities (funded with pre-tax money, such as those within an IRA or 401(k)), the entire distribution may be taxable as ordinary income and subject to the 10% penalty if taken before age 59½.
Withdrawals can also impact guaranteed living benefits (GLBs) or guaranteed death benefits (GDBs). Taking money out may reduce or terminate these riders, potentially diminishing the annuity’s protections or income guarantees. Many annuities offer a “free withdrawal” provision, allowing policyholders to withdraw a certain percentage of their contract value annually (often up to 10%) without surrender charges. Amounts withdrawn beyond this limit are subject to applicable surrender charges.
Preparing Your Withdrawal Request
Before submitting a withdrawal request, gather all necessary information and understand the annuity provider’s specific requirements. This helps ensure the request is processed smoothly.
Locate your annuity contract information, including the policy number and the name of the issuing insurance company. This information is typically found on annual statements or contract documents. Having these details readily available streamlines the initial steps of the withdrawal process.
Contact your annuity provider directly or consult with your financial advisor. They can provide precise instructions for withdrawal procedures, inform you of any specific forms required, and clarify any questions regarding your contract’s terms. This helps prevent errors and ensures compliance with company policies.
The provider will direct you to the correct forms, which commonly include an “Annuity Withdrawal Request Form” and a “Tax Withholding Election Form.” These forms are specific to each insurance company and are necessary for initiating the withdrawal. Some providers offer these forms through their secure online portals, while others may require them to be mailed.
When completing the forms, provide various pieces of information. This includes personal identification details such as your full name, current address, Social Security number, and date of birth. Specify your annuity contract number and the desired payout option, whether a lump sum, partial withdrawal, or annuitization details. If opting for a partial withdrawal, the exact amount requested will be required.
For direct deposit of funds, accurate banking information, including the account type, routing number, and account number, must be provided. Indicate your tax withholding preferences on the appropriate form to ensure that federal and state taxes are properly accounted for. For larger withdrawal amounts, a signature guarantee or notarization may be necessary to verify your identity and prevent fraud.
Submitting and Receiving Funds
After preparing your withdrawal request, submit the completed documentation and understand the process for receiving your funds. This final stage involves specific methods of delivery and expected timelines.
Annuity providers offer several methods for submitting completed withdrawal forms. Common options include mailing the forms to a designated address, using a secure online portal, or submitting via fax. For physical documents, sending them via certified mail is advisable to ensure proof of delivery.
Once the provider receives all completed documentation, they begin processing the request. Processing timelines can vary, generally ranging from a few business days to several weeks, depending on the complexity of the request and the provider’s administrative procedures. Some lump-sum withdrawals may be processed more quickly.
Following the submission, the annuity provider will usually send a confirmation to acknowledge receipt of your request and to inform you that it is being processed. Upon approval and processing, the funds are disbursed according to your chosen method. This typically involves direct deposit into the specified bank account, which is often the quickest way to receive funds. Alternatively, a physical check may be mailed to the address on file.
If the funds are not received within the expected timeframe, follow up with the annuity provider. Checking the status of your request with their customer service department can provide updates and address any potential delays.