The Benefits of Annuity Withdrawals

Shawn Plummer

CEO, The Annuity Expert

The Basics of Annuity Withdrawals

An annuity is an investment that provides a steady income stream, usually during retirement. With annuities, you contribute funds that grow tax-deferred until you start receiving payments. But can you withdraw funds from an annuity? Absolutely. However, knowing the rules of annuity withdrawals is essential to avoid unexpected costs.

Annuities can be classified into two categories: qualified annuities and non-qualified annuities. Qualified annuities are funded with pre-tax dollars and often integrated with other retirement accounts like IRAs, while non-qualified annuities are purchased with post-tax dollars. Each type has different withdrawal rules, which we’ll discuss later.

Key Takeaways:

  • Annuities provide different withdrawal options for policyholders.
  • Withdrawal options include death benefits, fixed amount payments, fixed period payments, joint and survivor life payments, life only payments, life with period certain payments, and lump sum payments.
  • Withdrawal options may vary depending on the annuity contract.
  • Not all annuities offer the same payout options.
  • It is important to review the terms and conditions of an annuity contract to understand the available withdrawal options.

For more information about annuity annuitization requirements and annuity contracts, inquire about a free quote from our team.

Common Annuity Payout Options

Annuities offer a range of payout options for policyholders to consider. Each option comes with its own set of benefits and considerations. Understanding these options is crucial for individuals seeking to make informed decisions about their annuity contracts and maximize the benefits they provide. Let’s explore some common annuity payout options:

  • Fixed Amount (Systematic Withdrawal): This option allows policyholders to choose a specific amount to receive each month. It provides a predictable income stream, making budgeting easier.
  • Fixed Period (Period Certain): With this option, policyholders receive payments for a defined period, such as 10 or 20 years. If the annuitant passes away before the end of the period, the remaining payments go to the beneficiaries.
  • Joint and Survivor Life: This option ensures that payments continue as long as either the annuitant or their spouse is alive. It provides financial security for couples, particularly in cases where one partner outlives the other.
  • Life Only: With this option, annuity holders receive income for their lifetime. However, payments cease upon the annuitant’s death, so it may not be suitable for individuals concerned about leaving a financial legacy.
  • Life with Period Certain: This option combines a lifetime income stream with a guaranteed period of payments. For example, an annuity may offer payments for life with a period of 10 years. If the annuitant passes away before the end of the period, the remaining payments go to beneficiaries.
  • Lump Sum Payment: This option allows policyholders to receive their annuity payout in one lump sum. It provides immediate access to the full amount, but it’s important to consider potential tax implications and the need for long-term financial planning.

The choice of annuity payout option depends on individual preferences, financial goals, and circumstances. By carefully assessing these factors, annuity holders can select the option that best suits their needs.

Alternative Withdrawal Options

In addition to the traditional annuity payout options, annuity holders have access to alternative withdrawal options that can provide additional flexibility. These options include partial surrenders, systematic withdrawals, and full surrenders or lump sum distributions.

partial surrender allows policyholders to withdraw a portion of their annuity without incurring surrender charges. This can be useful for individuals who need access to immediate funds but still want to maintain a portion of their annuity for future income. It’s important to note that partial surrenders may be subject to certain limitations depending on the specific annuity contract.

Systematic withdrawals provide annuity holders with automatic payments on a regular schedule. This allows policyholders to receive a steady stream of income from their annuity, similar to receiving a paycheck. However, it’s important to understand that systematic withdrawals do not guarantee lifetime income like some of the other annuity payout options.

Full surrenders or lump sum distributions allow policyholders to receive their entire annuity in one payment. This can be beneficial for individuals who require a large sum of money upfront for a specific purpose. However, it’s important to consider the potential tax implications of receiving a lump sum distribution, as well as the impact this may have on future retirement income.

It’s worth noting that while these alternative withdrawal options can provide flexibility, they may not be suitable for everyone. The decision to utilize these options should be based on individual financial goals and needs, as well as an understanding of the potential impact on future annuity income.

Example table:

Withdrawal OptionDescriptionBenefitsConsiderations
Partial SurrendersAllows policyholders to withdraw a portion of their annuity without surrender chargesImmediate access to funds, flexibilityPossible limitations depending on the annuity contract
Systematic WithdrawalsProvides automatic payments on a regular scheduleSteady income stream, similar to a paycheckNo guarantee of lifetime income
Full Surrenders or Lump Sum DistributionsAll annuity funds received in one paymentImmediate access to a large sum of moneyPotential tax implications, impact on future retirement income

What Types Of Annuities Allow Withdrawals?

A deferred annuity allows annuity owners to withdraw money from their accounts regularly, making it a valuable tool for those who need regular liquidity. In addition, with a deferred annuity, annuity owners can choose to receive monthly, quarterly, or annual payments, making it easy to withdraw money as needed.

Additionally, deferred annuities offer flexible withdrawal options, allowing annuity owners to tailor their withdrawals to fit their needs. For example, annuity owners can choose to receive a lump sum payment at the end of the deferral period or elect to receive payments over a more extended period.

Fixed, variable, fixed-indexed, and long-term care annuities are all deferred.

What Types Of Annuities Allow Withdrawals

What Types Of Annuities Do Not Allow Withdrawals?

Immediate annuities provide a guaranteed income stream for life but do not offer annuity withdrawals for regular liquidity. Annuitized payments do not offer withdrawals either. This means that once you start receiving payments from an immediate annuity, you cannot stop or change the amount you receive. Therefore, if you need access to your money sooner than expected, an immediate annuity may not be the right choice.

Contracts That Do Not Allow Annuity Withdrawals

Annuity Withdrawals At A Glance

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

Can you take your money out of an annuity without a penalty?

Yes. Most annuities will allow an annuity owner to withdraw money out of their annuity through various ways, including:

Beige Craft Paper Inspirational Quote Instagram Post Portrait

Annuity Withdrawals Before Age 59 1/2

If the annuity owner is under 59 1/2, they must also pay a 10% early withdrawal penalty tax to the IRS and ordinary taxes. Withdrawals after 59 1/2 avoid this 10% penalty. There are exceptions as well to avoid this penalty.

Related Reading: The Internal Revenue Code section 72(q) permits you to withdraw funds early in certain situations

Annuity Withdrawal After 59 1/2

If the annuity owner withdraws after 59 1/2, there is no 10% early withdrawal penalty tax. Annuity withdrawals will only be subject to ordinary income taxes.

Why Are There Surrender Charges?

Annuity owners who surrender their annuities early may be subject to penalties to discourage using deferred annuities as short-term investment vehicles.

Withdrawals During The Surrender Period

With annuities, if you want to access your money before the maturity date, you may have to pay a penalty in the form of a surrender fee. Surrender fees make up for the interest the insurance company would lose if people constantly withdrew their money early. Fortunately, these charges decrease yearly as the contract matures and starts earning interest for the insurance company.

Withdrawals After The Surrender Period

After the surrender period has passed, there will be no charge when you choose to withdraw your money.

How To Get Money Out Of annuity Without Penalty

Wondering how to get money out of an annuity without penalty? A penalty-free withdrawal in a deferred annuity is a specific percentage an annuity owner can pocket from the savings without incurring a withdrawal charge. The withdrawal percentage varies by contract, but 10% of the total annuity value seems to be the standard amount of income liquidated each year.

Most deferred annuities offer penalty-free withdrawals that are friendly to Required Minimum Distributions. This mandatory annuity withdrawal begins at age 73.

Penalty-Free Withdrawal of Original Premium

Annuity withdrawal rules typically offer two types of penalty-free withdrawals:

  • Original Premium
  • Current Account Value

A penalty-free withdrawal of the original premium allows the annuity owner to withdraw a certain percentage based on the original investment.

Example:

You have purchased a $100,000 annuity. There is a 10% penalty-free withdrawal provision of the original premium of $10,000. So you can pocket up to $10,000 in annuity withdrawals every year without a surrender charge. It’s predictable.

A Free Withdrawal of the Account Value

A penalty-free withdrawal of the account value allows the annuity owners to withdraw a certain percentage based on the current accumulation value.

Example:

  • You have purchased a $100,000 annuity. Let’s say there is no growth or loss in this policy. Account balances stay the same.
  • There is a 10% penalty-free withdrawal provision of the current account value.
  • In Year 1, you can withdraw up to $10,000. But, first, you withdraw the amount of $10,000.
  • Your current contract value is now worth $90,000. You want to make another withdrawal next year. In year 2, you can withdraw up to $9,000.
  • Why?
  • Because the current account value is $90,000, you can withdraw up to 10%.

Original Premium Vs. Account Value

If you plan to withdraw from your retirement savings every year during the deferral period, 10% of the original premium is better because of the predictability and the more retirement income you can spend.

If you plan to withdraw now and again during the deferral period, 10% of the account value might be a better option because your account value could go up. 

The higher the account balance, the higher the withdrawal amount you will have the following year.

Systematic Annuity Withdrawals

Systematic annuity withdrawals from an annuity are the automated withdrawal of periodic income payments (via penalty-free withdrawals) throughout the year instead of pocketing the maximum dollar amount once a year. 

A contract owner can make withdrawal annuity income payments systematically via:

  • monthly payments
  • quarterly payments
  • semi-annual payments

Check out the accumulating penalty-free withdrawals feature if you need more deferred income than the allotted amount.

Example:

You’ve purchased a traditional fixed annuity and want a monthly income from the interest earned. Contract owners can set up automatic monthly payments (via annuity forms) to be withdrawn and deposited into their checking or savings accounts.

Accumulating Penalty-Free Withdrawals

This is a rare feature in annuity products.  

If you don’t take your allotted withdrawal amount in a given year, it “rolls over” into the following year, providing more liquidity from the account balance.  

Think “cell phone minutes.”  

What’s so good about accumulating withdrawals is that it helps protect annuity owners in emergencies or, frankly, if your retirement account doesn’t perform well during the accumulation phase.  

Example: 

  • Your annuity allows for 10% of the account value that can be withdrawn penalty-free annually, and it also has an accumulating feature with a maximum of up to 50%.   
  • You don’t withdraw anything in year 1.   
  • Your 10% withdrawal rolls over to year 2, allowing up to a 20% penalty-free withdrawal.  
  • In year 2, the same situation occurs, and you don’t touch a dime.   
  • That year’s 10% rolls over to year 3, allowing up to 30% the following year.  
  • Same thing each year during the deferral period until the end of year 5, where you’ve accumulated the maximum limit of a 50% free withdrawal.
  • At that point, you can pocket or transfer 50% of your total contract value without incurring surrender charges.  
  • What happens after you move 50%? The percentage amount starts over at 10%.     

Return of Premium

The Return of Premium (ROP)  feature in annuities is easy to understand.  

The annuity rules state that you can get your original premium back minus any withdrawals and fees without penalty during the deferral period you want to cancel or surrender the policy.  

When exercising the Return of Premium feature, the annuity owners must take all the money back or nothing at all. Therefore, there is no partial return on the premium.     

Return of Premium vs. Accumulating Withdrawals

If you’re seeking more liquidity but are unsure which route best suits you, let me provide the pros and cons of each feature.

Return of Premium returns your original investment minus any withdrawals and fees.   

If you’re in year 5 of an annuity contract and want to receive your money back, all interest earned will go to the insurance company, not you.  

With Accumulating Penalty-Free Withdrawals, you can receive a large portion of your account balance and keep your earnings.    

If you’re in year 5 of the contract and only want back some of your annuity accounts, this method might be better because the previous five years won’t be wasted growing your retirement savings.     

Nursing Home Waivers

Today, most deferred annuities waive all surrender charges if the annuity contract owner enters a qualified nursing home for a specific consecutive number of days.  

The nursing home waiver tends to come with the annuity contract at no additional cost.

Terminal Illness Waiver

Today, most deferred annuity contracts waive all surrender charges if a physician diagnoses the contract owner as terminally ill.  

Terminal illness diagnosis describes that a person will live for the next 12 months or less. 

Annuity Bailout Provision

An Annuity bailout provision in indexed fixed annuities refers to caps, spreads, fees, interest rates, and participation rates renewing throughout the contract period. For example, suppose a cap or participation rate renews at a certain level or below. In that case, all surrender charges will be waived from the account balance, and the contract owner can move the entire annuity account penalty-free.  

Example:

  • You purchase an indexed annuity with a bailout cap of 3%. 
  • You start your retirement account with an annual point-to-point strategy with a 5% cap. 
  • The following year that 5% cap lowers to a 2.8% cap. 
  • All surrender charges are waived. 
  • You can leave your annuity contract without penalty.

Commutation Withdrawal Benefit

An income annuity (immediate or deferred) is the annuity type that does not often offer liquidity. These products convert your initial investment into irrevocable annuity payments of retirement income without any cash value.

However, a commutation withdrawal benefit offers annuitized income annuities such as an immediate or deferred income annuity or a one-time emergency withdrawal. Commutation Withdrawal Benefits do not apply to QLAC or Medicaid annuities.

When Can You Cash Out An Annuity?

Can you cash in an annuity? You can cash out a deferred annuity anytime, but there might be a penalty. However, once the surrender period has been met, your investment becomes 100% liquid in most cases, and you can cash out the deferred annuity without a penalty.

You can not cash out an immediate annuity or an annuity that has been annuitized.

Related Reading: When should I start withdrawing from my annuity

Next Steps

If you are thinking about an annuity, it is essential to understand the difference between immediate and deferred annuities. Your money is locked in with an immediate annuity; you cannot withdraw it without penalty. On the other hand, a deferred annuity allows you to withdraw some or all of your money at any time. Contact us today for a free quote and more information about these two annuities. We would happily help you choose the best option for your needs.

Annuity Withdrawals

Request A Quote

Get help or a quote from a licensed financial professional. This service is free of charge.

Contact Us
First
Last

Frequently Asked Questions

Can you get your money out of an annuity?

The answer to this question depends on the type of annuity you have. If you have an annuity structured as an immediate annuity, you will not be able to get your money out. However, if you have an annuity structured as a deferred annuity, you may be able to withdraw some or all of your money at any time.

Do annuities have free withdrawals?

The answer to this question also depends on the type of annuity. For example, if you have an annuity structured as an immediate one, you cannot withdraw without penalty. However, if you have an annuity structured as a deferred annuity, you may be able to make free withdrawals up to a certain amount each year.

What are the penalties for withdrawing money from an annuity?

If you withdraw money from an annuity before you are 59 1/2 years old, you will generally have to pay a 10% early withdrawal penalty. In addition, you may also have to pay surrender charges if you withdraw money from a deferred annuity before maturity.

When can you start withdrawing from an annuity?

The answer to this question depends on the type of annuity you have. For example, you cannot withdraw but receive a distribution if you have an annuity structured as an immediate annuity. However, if you have an annuity structured as a deferred annuity, you may be able to withdraw some or all of your money at any time.

How much tax do you pay on an annuity withdrawal?

The tax you pay on an annuity withdrawal depends on the type of annuity and when you withdraw the money. Income from annuities is generally taxed as ordinary income taxes. However, if you have a deferred annuity and withdraw the money before 59 1/2, you must pay a 10% early withdrawal penalty.

What is the maximum free withdrawal from an annuity?

The answer to this question depends on the type of annuity you have. If you have an annuity structured as a deferred annuity, you can make free withdrawals up to a certain amount each year. For example, most deferred annuities offer a penalty-free withdrawal of up to 10% annually. However, if you have an annuity structured as an immediate one, you cannot withdraw without penalty.

How can I withdraw my annuity without penalty?

The answer to this question depends on the type of annuity you have. If you have an annuity structured as a deferred annuity, you can make free withdrawals up to a certain amount each year. For example, most deferred annuities offer a penalty-free withdrawal of up to 10% annually. However, if you have an annuity structured as an immediate one, you cannot withdraw without penalty.

Can I take money out of my annuity to buy a house?

You may be able to access funds in your annuity to purchase a home, but it depends on the type of annuity and the contract terms. For example, some annuities allow penalty-free withdrawals for specific purposes, such as buying a home. However, accessing funds in an annuity before the maturity date or end of the contract period can result in early withdrawal penalties, tax implications, and reduced future income.

Do you get your principal back with an annuity?

Whether or not you receive your original principal back with an annuity depends on the type of annuity and the contract terms. With a fixed annuity, the original principal may be returned in full at the end of the contract period, along with any accumulated interest. With a variable annuity, the return of the original principal will depend on the performance of the underlying investments. There is no guarantee that the total amount will be returned. With an immediate annuity, the original principal purchases a stream of income payments and is not typically returned. It’s essential to understand the terms of your annuity contract and the potential for the return of your original principal before deciding to purchase an annuity.

How long does it take to cash out an annuity?

The time it takes to cash out an annuity depends on the type and contract terms. For example, cashing out a fixed annuity at the end of the contract period may be a straightforward process that takes a few weeks. However, cashing out an annuity before the maturity date or end of the contract period can result in early withdrawal penalties, tax implications, and reduced future income. Withdrawals from annuities are also subject to federal and state taxes, and paying taxes can take additional time. The exact amount of time it takes to cash out an annuity will depend on the terms of the contract, the type of annuity, and the complexity of the withdrawal process.

Are annuities liquid?

The liquidity of an annuity depends on the type of annuity and the terms of the contract. Some annuities, such as fixed annuities, may have limited liquidity during the accumulation phase, with penalties for early withdrawals. Other annuities, such as variable annuities, may offer more flexible withdrawal options, but the amount of liquidity may depend on the performance of the underlying investments. Immediate annuities provide a guaranteed income stream for life, but once payments begin, they are not typically liquid.

How to get money out of an annuity without penalty?

Depending on the type of annuity, money can be withdrawn without penalty by taking a lump sum or using a partial surrender.

Can an annuity be withdrawn?

Annuities can typically be withdrawn at any time, though fees and withdrawal charges may apply depending on the type of annuity.

Can I take my annuity out early?

Yes, but taking an annuity out early will result in a penalty. In addition, depending on the annuity type, additional fees might be associated with early withdrawal.

Can you take a lump sum from an annuity?

Yes, annuities typically allow for a lump sum withdrawal of the total balance. However, this may result in a penalty and additional fees.

Can I access my retirement annuity before retirement?

Generally, you may be allowed to make sure withdrawals before retirement, but these typically come with restrictions and penalties. For example, withdrawals made before the age of 59 ½ may result in a 10% penalty fee on top of ordinary income taxes. It’s also important to consider that taking money out of your annuity could reduce its growth potential and your ultimate return on investment.

How much can I withdraw from an annuity without penalty?

The amount you can withdraw from an annuity without penalty depends on the terms of your specific annuity contract. Some annuity contracts offer a free withdrawal feature, which allows you to withdraw a certain percentage of the total value of your annuity each year without incurring penalties. However, if you withdraw more than the free withdrawal amount or make an early withdrawal before 59 ½, you may be subject to surrender charges and penalty taxes.

Can you withdraw funds from an annuity?

Yes, you can withdraw funds from a deferred annuity. You can not withdraw funds from an immediate annuity or annuitized contract.

At what age can you cash annuities?

You can typically start withdrawing from annuities penalty-free at age 59 ½.

What are the rules of an annuity withdrawal after 59 1/2?

An annuity withdrawal after 59 1/2 refers to the ability of an annuity owner to withdraw funds from their annuity account without incurring an early withdrawal penalty. This age is significant as it represents the point at which the IRS no longer imposes a 10% penalty on withdrawals made before reaching the age of 59 1/2.

How is an annuity withdrawal calculator used?

An annuity withdrawal calculator is a tool used to estimate the amount of money an individual can withdraw from their annuity on a regular basis. By inputting various factors such as age, investment amount, and desired withdrawal frequency, the calculator provides an estimate of sustainable withdrawal amounts.

What are annuity withdrawal penalty exceptions?

Annuity withdrawal penalty exceptions refer to situations in which individuals can withdraw funds from an annuity without incurring penalties. Common exceptions include the death or disability of the account holder, fixed-term annuities reaching maturity, and certain qualified education expenses. It is important to review the terms and conditions of the specific annuity contract for more details on penalty exceptions.

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

Scroll to Top