The Benefits of Annuity Withdrawals

Navigating the world of annuities can feel like a maze. With complex terms like “systematic withdrawal” and “deferred annuity,” it’s easy to get lost. But here’s the good news—you’re not alone, and with the proper guidance, you can navigate your way to financial success. This guide will break down annuity withdrawal rules, giving you the knowledge to make the most of your investments and avoid unnecessary penalties. Let’s get started.

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.

The Annuity Withdrawal Calculator

An annuity withdrawal calculator can be a beneficial tool. A specific withdrawal rate allows you to estimate the money you’ll receive over a certain period or calculate how long your annuity will last. These calculators can help you plan your retirement effectively.

Annuity Withdrawal Penalty and Exceptions

Annuity withdrawal penalties can be substantial, and it is essential to understand the terms of your contract before making any withdrawals. Most annuity contracts have a surrender charge, a fee the insurance company charges for early withdrawals made within a specified period. The surrender charge can be a percentage of the withdrawn amount or a flat fee.

However, there are some exceptions to the penalty tax on early withdrawals. For example, if you become disabled, the penalty tax may be waived. Additionally, if you withdraw money from your annuity to pay for medical expenses that exceed 10% of your adjusted gross income, you may be exempt from the penalty tax.

How to Get Money from an Annuity Without Penalty

The question of how much one can withdraw from an annuity without penalty is vital. As mentioned, you’re generally allowed a penalty-free withdrawal of up to 10% per year. However, withdrawals beyond this amount or those made before 59 1/2 could incur a surrender charge or an IRS penalty. Therefore, understanding the specifics of your annuity contract and seeking professional financial advice is crucial.

Decoding the Systematic Withdrawal Strategy

Systematic withdrawal regularly takes out a certain amount of money from your annuity. This strategy can be tailored to meet your financial needs and goals. First, however, you need to balance your withdrawal rate with the lifespan of your annuity to ensure that you don’t outlive your savings.

Cashing in Annuity Early

If you need to withdraw a large sum from your annuity, you may be able to cash it in early. Cashing in an annuity early means you surrender your contract and receive the contract’s cash value minus any surrender charges and taxes owed. However, cashing in an annuity early can result in a significant loss of value, and you may receive less money than you initially invested.

Annuity Withdrawal Tax Penalty

Withdrawals made before the age of 59 ½ may be subject to a 10% penalty tax by the IRS and any taxes owed on the withdrawn amount. The penalty tax is in place to discourage people from taking money out of their retirement accounts before they reach retirement age. However, there are exceptions to the penalty tax, as we mentioned earlier in the guide.

It’s important to note that withdrawing money from an annuity is subject to income tax. You must report the withdrawn amount on your tax return and pay taxes at your marginal rate. Therefore, keeping accurate records of your annuity withdrawals is essential so you know how much you have withdrawn and owe in taxes.

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 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.

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.     

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 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.

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.

Request A Quote

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

Frequently Asked Questions