I Have an Annuity and I Need Cash Now. What Are My Options?

An annuity functions as a financial product designed for long-term savings and retirement. While these contracts are structured to provide future income streams, unforeseen circumstances can create an immediate need for cash. Understanding the various methods available to access funds from an annuity is important for individuals facing such situations. This includes direct interactions with the annuity issuer or exploring options with third-party entities.

Accessing Funds Through Your Annuity Contract

Accessing funds directly from an annuity issuer typically involves options available within the contract, primarily for deferred annuities where funds have accumulated over time. A common method is a partial withdrawal, allowing the contract holder to take out a portion of the accumulated value. Many annuity contracts permit a “free withdrawal” allowance, often around 10% or more of the contract value annually, without incurring surrender charges. Exceeding this allowance may result in penalties, as the withdrawal reduces the overall contract value and potentially future earnings.

A full surrender involves cashing out the entire annuity contract. This action terminates the annuity agreement, meaning all future benefits and guarantees associated with the contract cease. When a contract is fully surrendered, the annuity issuer will apply surrender charges, which are fees designed to compensate the insurer for early termination. These charges are typically a percentage of the amount withdrawn or surrendered, often declining over a period of several years, such as seven to ten years, after the contract’s purchase.

Another way to access funds from an annuity, particularly for those seeking a steady income rather than a lump sum, is through annuitization. This process converts the annuity’s accumulated value into a series of regular, periodic payments. Once annuitized, the contract holder relinquishes control over the original lump sum principal in exchange for guaranteed income payments that can last for a specified period or for life. While this does not provide immediate cash, it establishes a reliable cash flow.

Selling Future Annuity Payments

Selling future annuity payments represents a distinct method of obtaining immediate cash. This option is generally available for individuals who are already receiving payments from an immediate annuity, a structured settlement, or lottery winnings. The process involves selling some or all of these guaranteed future payments to a third-party company, often referred to as a factoring company, in exchange for a lump sum now.

These companies specialize in purchasing future payment streams and will offer a discounted lump sum amount. The discount rate applied reflects the time value of money, the risk associated with the transaction, and the company’s profit margin. For instance, if an individual is due to receive $100,000 in future payments, they might receive $70,000 to $85,000 as a lump sum, depending on the discount rate and other factors.

The sale of future annuity payments is a legally complex transaction that typically requires court approval to ensure the seller’s interests are protected. This method is distinct from surrendering a deferred annuity directly to an insurance company, as it involves a third-party entity purchasing an existing income stream rather than terminating the original contract with the insurer.

Tax Considerations for Accessing Funds

Accessing funds from an annuity, whether through withdrawals, surrenders, or selling future payments, carries specific tax implications. Generally, the earnings or growth within an annuity are tax-deferred, meaning taxes are not paid until withdrawal. For non-qualified annuities, which are purchased with after-tax dollars, withdrawals are typically subject to the “Last-In, First-Out” (LIFO) rule. This means that earnings are considered withdrawn first and are taxed as ordinary income.

The original principal, or the contributions made to the annuity, is generally returned tax-free because those funds were already taxed before being invested. For example, if an individual contributed $50,000 and the annuity grew to $70,000, the first $20,000 withdrawn would be considered taxable earnings. Any subsequent withdrawals, up to the original $50,000, would be considered a tax-free return of principal.

A 10% early withdrawal penalty may apply to taxable distributions from an annuity made before the age of 59½. This penalty is imposed by the Internal Revenue Service (IRS) on top of the regular income tax due on the earnings. However, certain exceptions can waive this penalty, including withdrawals made due to the annuitant’s death or qualifying disability, or those used for certain unreimbursed medical expenses.

The tax treatment of qualified annuities, such as those held within an IRA or 401(k), differs significantly. Since contributions to qualified annuities are often made with pre-tax dollars, all distributions from these accounts, including both principal and earnings, are generally taxed as ordinary income upon withdrawal. Regardless of the annuity type, the annuity company will issue a Form 1099-R for taxable distributions. When selling future annuity payments to a third party, the lump sum received may also be subject to income tax, similar to regular income, though the exact tax treatment can be complex and often warrants consultation with a tax professional.

Key Information from Your Annuity Contract

Before deciding on any course of action to access cash from an annuity, it is important to consult the annuity contract. This document contains crucial details that will directly impact the available options and their financial consequences. Understanding the specific type of annuity, such as whether it is a fixed, variable, or indexed annuity, and if it is qualified (e.g., held within an IRA) or non-qualified, is fundamental.

Locating the current account value is also essential, as this represents the total amount accumulated in the annuity at a given time. The contract will also detail the surrender charge schedule, outlining the specific percentages that would be deducted if funds are withdrawn or the contract is surrendered within a certain period, often decreasing annually over a period of several years. Identifying the free withdrawal allowance is also important, as this specifies the percentage or amount that can be withdrawn annually without incurring these surrender charges.

Reviewing the death benefit provisions is advisable, as accessing funds can impact the amount available to beneficiaries. The contract will specify who the designated beneficiaries are and how the death benefit is calculated. Any riders or guarantees attached to the annuity, such as guaranteed income riders or guaranteed withdrawal benefits, should also be examined, as these may offer specific provisions for accessing funds or affect the overall value and benefits. Finally, having the insurer’s contact information readily available will facilitate direct inquiries and provide clarity on specific contract terms.