When Should I Start Taking Money Out of My Annuity?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

When Should I Start Taking Money From My Annuity

Age Considerations: At what age do I have to withdraw from my annuity

The answer largely depends on the type of annuity. For some annuities, especially those held within an IRA, the IRA annuity withdrawal rules mandate you begin distributions by age 73. However, individual annuity contracts might have their own specifications.

Example: John has an IRA annuity and turned 73 this year. He is now required to start taking required minimum distributions from his annuity based on his life expectancy.

When Should I Start Taking Money Out Of My Annuity

Financial Penalties: How can I get money from my annuity without penalty?

Withdrawals made before the age of 59½ often incur a 10% penalty imposed by the IRS. This is on top of the regular income tax. Additionally, many annuities have surrender charges if you withdraw beyond the allowed free withdrawal amount in the contract’s early years.

Example: Susan, at 57, decided to withdraw a portion of her annuity for an emergency. She had to pay taxes on the amount and faced a 10% penalty due to her age.

How Can I Get Money From My Annuity Without Penalty

Making the Most of Free Withdrawals

What is a Free Withdrawal on an Annuity?

Most annuity contracts allow a certain to be withdrawn annually without facing surrender charges. This is often termed as a “free withdrawal.”

Example: If David’s annuity permits a 10% free withdrawal annually, and his account value is $100,000, he can take out $10,000 in a year without penalties.

Ira Annuity Withdrawal Rules

Cashing Out vs. Withdrawing: What’s the Difference?

Cashing Out an Annuity

This refers to completely liquidating your annuity. While it provides a lump sum, it might result in significant surrender charges, especially if done in the annuity’s early years.

Example: Lisa decided to cash out her annuity five years after purchasing it. She received her entire investment minus the surrender charges outlined in her contract.

Withdrawing from an Annuity

This entails taking out partial amounts, either systematically or as needed. While this allows for greater flexibility, one must be cautious of potential penalties or charges.

Example: Mike chooses to withdraw $5,000 annually from his annuity for vacation. He ensures the amount is within the free withdrawal limit to avoid penalties.

What Is A Free Withdrawal On An Annuity

Next Steps

Choosing when to start taking money from your annuity is a decision shaped by various factors – from age to financial needs. By understanding the difference between cashing out and withdrawing, the implications of free withdrawals, and age-related rules. As with all financial decisions, consider consulting a financial advisor who can provide insights specific to your needs.

Cashing Out An Annuity

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Frequently Asked Questions

At what age can you take money out of an annuity without penalty?

Typically, you can take money out of an annuity without incurring a penalty after age 59½. Withdrawals made before this age might be subject to the IRS’s 10% early withdrawal penalty and regular income tax. Specific contract terms may also apply.

What is the tax penalty for withdrawing from an annuity?

Withdrawing from an annuity before age 59½ may result in a 10% early withdrawal penalty by the IRS, on top of regular income taxes on the gains. Additionally, annuity contracts might have surrender charges based on the contract’s terms. It’s essential to review your specific agreement and consult a tax professional.

How can I withdraw from my annuity without paying taxes?

Minimizing tax impacts during annuity withdrawals requires strategic planning. One method is to prioritize withdrawing only your original investment, known as the cost basis, since this portion isn’t taxed. Another strategy is structuring your withdrawals as a series of equal periodic payments. Additionally, considering rolling the annuity into another retirement account could defer taxes. Regardless of the chosen approach, consulting a tax professional is essential to make informed decisions.

How early can an annuity start paying?

One of the most attractive features of certain annuities is the rapidity with which they can begin to pay out. Annuity payments can start as early as 30 days from the issue date.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, 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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