How to Get Money Out Of An Annuity Without A Penalty

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Withdrawing While Avoiding The Annuity Early Withdrawal Penalty

In addition to potential surrender charges, 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For qualified annuities, all income withdrawn is subject to this penalty and income taxes.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 age 59 1/2, whichever is longer.

Non-Qualified Annuity and 72(q) Distributions

Only interest earned is withdrawn for non-qualified annuities, subject to this penalty and income taxes.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 age 59 1/2, whichever is longer.

Annuity Early Withdrawal Penalty

Withdrawing While Avoiding Surrender Charges

Penalty-Free Withdrawal

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 However, most deferred annuities allow a percentage, typically 10 percent, to be withdrawn yearly without penalty.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 QLAC or Medicaid annuities.

Annuity Withdrawal After 59 1/2

Penalty-Free Withdrawals At a Glance

Variable
Annuity
Fixed Index
Annuity
Fixed
Annuity
Immediate
Annuity
Deferred
Income
Annuity
72(t) DistributionsYesYesYesNoNo
72(q) DistributionsYesYesYesNoNo
Penalty-Free WithdrawalYesYesYesNoNo
Return Of PremiumYesYesYesNoNo
Health-Related WaiversYesYesYesNoNo
Annuity Bailout ProvisionNoYesNoNoNo
Commutation Withdrawal BenefitNoNoNoYesYes

Conclusion

To withdraw money from an annuity without a penalty, you can wait until the surrender period ends, use the annuity’s free withdrawal provision if available, or opt for annuitization, which converts your annuity into a series of regular payments. It’s essential to check your annuity contract for specific terms and conditions.

How To Get Money Out Of Annuity Without Penalty

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Frequently Asked Questions

Can you withdraw money from an annuity?

Yes, it is possible to withdraw money from an annuity. However, the process and fees involved vary depending on the specific terms of the annuity contract. It is important to review the terms and conditions, including any surrender charges or tax implications, before deciding to withdraw funds from an annuity.

How do you take money out of your annuity?

Through scheduled payments, lump-sum withdrawals post-surrender period, or using the free withdrawal limit provided in the contract.

How do you get money out of an annuity without a penalty?

Withdraw after the surrender period, use the free withdrawal provision, or utilize specific annuity features like annuitization.

What annuities are subject to an IRS penalty for early withdrawals?

Qualified annuities, such as those in IRAs and 401(k)s, often incur a 10% IRS penalty for withdrawals before age 59½.

When can you withdraw from an annuity without penalty?

After the surrender period, an annuity withdrawal after 59 1/2 for qualified annuities or under specific provisions in the annuity contract.

How much can I withdraw from an annuity without penalty?

Typically, up to 10% annually without penalty, though this depends on the specific terms of your annuity contract.

What is the penalty for cashing out an annuity?

There are surrender charges imposed by the insurance company and a 10% IRS penalty for withdrawals before age 59½ in qualified annuities.

When do you have to withdraw from an annuity?

Required Minimum Distributions (RMDs) for qualified annuities start at age 73.

What is the best way to take money out of an annuity?

Consider tax implications and potential surrender charges, and utilize free withdrawal provisions in your contract.

When should I start taking money out of my annuity?

The ideal time to start taking money out of an annuity depends on individual circumstances. Generally, it is recommended to wait until reaching retirement age, typically 59 ½ years old. However, if funds are needed earlier, it is crucial to consider potential penalties and the impact on long-term savings. Consulting a financial advisor can provide personalized guidance.

What are the rules for withdrawing from an annuity?

The rules for withdrawing from an annuity depend on the type of annuity and the age of the account owner. Generally, if an individual withdraws funds from an annuity before the age of 59½, they may face a 10% penalty tax. However, there are certain exceptions and options, such as annuitizing the account or taking systematic withdrawals, that may avoid penalties. It is advisable to consult a financial advisor or tax professional for guidance.

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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