What Happens When You Make an Early Withdrawal from an Annuity?

Shawn Plummer

CEO, The Annuity Expert

Examples of Early Withdrawal Consequences

  • Tax Penalties: Withdrawals before age 59½ may incur a 10% IRS penalty on the earnings portion.
  • Surrender Charges: Many annuities have surrender charges if you withdraw funds within a certain period after purchase, often ranging from 7-10 years.
  • Impact on Investment Value: Early withdrawals reduce the principal, potentially diminishing the long-term growth and payout.

Tax Implications of Early Withdrawal

  1. Ordinary Income Tax: Earnings withdrawn from an annuity are taxed as ordinary income.
  2. Specific Tax Rules: Different annuities (e.g., fixed, variable, immediate) have varying tax treatments.

How Surrender Charges Affect Your Withdrawal

  • Charge Percentage: Typically decreases annually.
  • Duration of Charges: Varies based on annuity contract terms.

Impact on Future Payouts and Investment Performance

  • Early withdrawals reduce the amount of capital available for future growth.
  • May affect the annuity’s ability to meet long-term income goals.

Avoiding Penalties and Maximizing Annuity Benefits

  1. Understand Your Annuity Contract: Be aware of the surrender period and charges.
  2. Consider Partial Withdrawals: Some annuities allow limited free withdrawals.
  3. Seek Professional Advice: Consult a financial advisor for personalized guidance.

Annuity Early Withdrawal Impact

Withdrawal YearSurrender Charge (%)Remaining Balance ($)Future Value at 10 Years ($)
Year 1109,00023,579
Year 289,20024,104
Year 369,40024,636
Year 449,60025,179
Year 529,80025,730
*Assuming a $10,000 initial investment and a 7% annual growth rate.

Conclusion

Early withdrawal from an annuity can result in significant penalties, taxes, and reduced investment value. Understanding your annuity’s terms and seeking financial advice can help you make informed decisions. 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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