Are Surrender Charges Taxed as Income When Cashing in an Annuity?

Shawn Plummer

CEO, The Annuity Expert

Understanding Surrender Charges and Taxation

When you cash in an annuity, surrender charges may apply. These are fees for withdrawing funds from an annuity contract early. The key question is whether these charges are taxed as income.

Key Points:

  1. Nature of Surrender Charges: Surrender charges are essentially penalties for early withdrawal. They reduce the amount you receive from your annuity.
  2. Taxation of Withdrawn Amounts: The income portion of the withdrawn amount from an annuity is taxable. Annuities typically have a portion of the principal (your initial investment) and earnings (interest or investment gains).
  3. Treatment of Surrender Charges: Surrender charges themselves are not taxed as income. They reduce the gross withdrawal but do not affect the taxable income component.

Examples:

  • Scenario 1: You withdraw $10,000 from an annuity, incurring a $1,000 surrender charge. The taxable income will be based on the net amount ($9,000) but only on the portion of this amount that represents earnings.
  • Scenario 2: If the entire $9,000 is earnings, then the full amount is taxable as income. If only $5,000 is earnings, then only this portion is taxable.

Conclusion

Surrender charges on annuities reduce the withdrawal amount but do not count as taxable income. The taxable portion depends on the earnings component of the withdrawn amount. Contact us today for a free quote.

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Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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