Annuity Withdrawals

Making annuity withdrawals can seem confusing, but it doesn’t have to be. This guide will discuss the types of annuity withdrawals and how they work. We will also provide tips on making the process as smooth as possible. So, if you consider making an annuity withdrawal, read this guide!

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 they can elect to receive payments over a more extended period of time.

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

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

• Immediate Annuities
• Deferred Income Annuities
• QLAC
• Medicaid Annuities
• Annuitized Contracts

Annuity Withdrawals At A Glance

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:

• Penalty-Free Withdrawals
• Accumulating Penalty-Free Withdrawals
• Return of Premium
• Systematic Withdrawals
• Health-Related Waivers
• Commutation Withdrawal Benefit
• Annuity Loans

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.

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.

Penalty-Free Withdrawals

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.

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.     

Health-Related Waivers

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 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.

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.

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