Understanding annuity withdrawals

Although an annuity is a long-term investment, you have the option to make a withdrawal at any time before annuitization, which is when the contract value is converted into a series of periodic income payments.

If you’re thinking about withdrawing money from your annuity, there are some things that you should consider first, including that the annuity product may have a surrender charge for early withdrawals, and the federal government may charge a tax penalty if you withdraw money before you reach age 59½. Understanding these facts will help you make a decision that has a positive impact on your plan.

Things to consider before you withdraw money from your annuity

When deciding whether to withdraw money from your annuity, it’s important to consider your financial needs, retirement goals and long-term income requirements, as well as the potential for fees and tax implications.

Are annuity withdrawals taxable?

If you are under the age of 59½, you may incur an early withdrawal penalty equal to 10% of the withdrawal amount, and that’s in addition to the income tax on the earnings.

If you withdraw after age 59½, you won’t have to pay a tax penalty, but you will need to pay ordinary income tax on the portion of your withdrawal that comes from earnings. Even when you withdraw money from an annuity after the surrender charge period and after you reach age 59½, you still have to pay the income tax.

Annuity early withdrawal considerations

Surrender charges and tax penalties exist to discourage the short-term use of annuities and minimize risk to the issuer. 

Will any additional riders be affected by your withdrawal?

Before making a withdrawal, consider any additional features (known as riders) that you chose when you purchased your annuity. These riders can impact your income, death benefit and preservation of your principal. Taking a withdrawal might reduce your income, stop it altogether or decrease your death benefit. Insurance companies often adjust guarantees based on the contract value, so please ask your financial professional or the insurance company for more information and confirm whether this applies to your situation.

Are there other ways to withdraw money without a surrender charge?

Certain annuity contracts include crisis waivers that suspend surrender charges for special situations, such as for nursing home confinement or a terminal illness. Your financial professional can help assess your needs.