Annuity withdrawals are a great way to access your money while still living off the income you have saved up over time. However, annuity withdrawals can be difficult if you don’t know what you’re doing. That’s why we’ve created this guide for people who want to learn how they can withdraw from an annuity themselves without having to rely on someone else or pay excessive fees.
Withdrawing While Avoiding The IRS Early Withdrawal Penalty
Penalties for withdrawing funds from a deferred annuity include an IRS 10% fee (in addition to ordinary income tax) for taking money out before you reach age 59 1/2.
Qualified Annuity and 72(t) Distributions
For qualified annuities, all income withdrawn is subject to this penalty and income taxes. However, Section 72(t) of the tax code is a law that allows people to take a fixed amount of money (pre-determined by the IRS) out of their retirement account without a penalty. 72(t) income distributions require substantially equal periodic payment for five years or until you reach or until age 59 1/2, whichever is longer.
Non-Qualified Annuity and 72(q) Distributions
For non-qualified annuities, only interest earned is withdrawn subject to this penalty and income taxes. However, Section 72(q) of the tax code is a law that allows people to take a fixed amount of money (pre-determined by the IRS) out of their retirement account without a penalty. 72(q) income distributions require substantially equal periodic payment for five years or until you reach or until age 59 1/2, whichever is longer .
Withdrawing While Avoiding Surrender Charges
A penalty or a surrender fee, also known as a withdrawal, or surrender charge, may be charged if you withdraw funds from an annuity. However, most deferred annuities allow a percentage, typically 10 percent, that can be withdrawn each year without a penalty.
Surrender charges are meant to make up for the annuity company’s loss if you withdraw (more than the allotted amount) before they can earn interest on your premium. Surrender charges decrease each year the annuity owner is in the contract and reduce to zero once the agreed term has been met.
Return Of Premium
The Return of Premium (ROP) feature in annuities allows owners to get their original premium back (minus any withdrawals and fees) without penalty anytime 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 of premium.
Today, most deferred annuities waive all surrender charges if the annuity contract owner enters a qualified nursing home or needs long-term care assistance.
Annuity Bailout Provision
A bailout provision in fixed indexed 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 reduced 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.
Commutation Withdrawal Benefit
An income annuity (immediate annuity or deferred income annuity) is the annuity type that does not often offer annuity withdrawals. Instead, these products convert your initial investment into irrevocable annuity payments of retirement income without any cash value.
With that said, a commutation withdrawal benefit offers a one-time emergency withdrawal. Commutation Withdrawal Benefits do not apply to a QLAC or Medicaid annuities.
Penalty-Free Withdrawals At a Glance
|Return Of Premium||Yes||Yes||Yes||No||No|
|Annuity Bailout Provision||No||Yes||No||No||No|
|Commutation Withdrawal Benefit||No||No||No||Yes||Yes|
Frequently Asked Questions
How do you get money out of an annuity without a penalty?
Most deferred annuities allow taking out up to ten percent of the total value each year without being charged a penalty.