Cashing Out an Annuity Early? What You Need to Know
Life happens — and sometimes you need flexibility.
If you own an annuity, you may reach a point when you need to access your money sooner than planned. Maybe it’s a home repair you didn’t see coming, an unexpected medical bill, or an expense that can’t wait. You might consider cashing out an annuity early.
Before you make a move, it helps to understand the realities of cashing out an annuity early. You can do it, but there may be costs involved.
In simple terms, an annuity is a contract where you put in money now and receive guaranteed payments later. When you take money out too soon, the insurance company may charge fees and the IRS may apply penalties, depending on your age.
The good news? You don’t have to be an expert. Read on to learn more and feel more confident about your next step.
Can You Cash Out an Annuity Early?
The quick answer: Typically, yes.
You can generally cash out an annuity early, but it might cost you money. Early withdrawals can potentially trigger two types of charges:
- Surrender charges from the insurance company
- IRS penalties if you’re younger than 59½
These costs vary depending on your contract, the type of annuity you own, and when you purchased it. Insurance companies typically structure annuities as long-term products, so early withdrawals are typically discouraged. That’s why many contracts include an early withdrawal fee, especially in the first several years.
On top of that, the IRS treats annuities as long-term retirement tools. If you take money out before age 59½, you may owe a 10% early withdrawal penalty, along with any taxes due from gains in the annuity.
What Are Surrender Charges?
A surrender charge is a fee the insurance company applies when you’re cashing out, or surrendering, an annuity early. Think of it like breaking a cell phone contract — you can get out early, but there’s a cost.
Surrender charges usually decline each year. This period is often called the surrender period. During this time, taking out more than your contract allows can trigger a fee. Surrender charges help the insurer recover the costs of setting up your annuity and providing guarantees.
Because the highest fees often appear in the first few years, timing matters. Even waiting just one more year could reduce or eliminate the fee.
IRS Penalties and Taxes
With annuities, taxes depend on whether yours is a qualified or non-qualified contract:
- Qualified annuities are typically tax-advantaged (like an IRA or Roth IRA). An IRA annuity (traditional IRA) is funded with pre tax or deductible contributions, so earnings grow tax deferred and withdrawals are taxed as ordinary income. A Roth IRA annuity is funded with after tax contributions, so earnings grow tax free and qualified withdrawals are not taxed.
- Non-qualified annuities are funded with after‑tax dollars. In this case, only the earnings are taxable.
Regardless of the type, if you withdraw money before age 59½, the IRS may charge a 10% early withdrawal penalty. That’s on top of regular income taxes.
The main thing to remember is that the tax rules aren’t designed to punish you. Instead, they’re meant to encourage long-term saving. But they can still impact your decision about cashing out an annuity early, especially if you’re years away from retirement.
Read More: Qualified vs. Non-qualified Annuities
How Much Can You Take Without a Penalty?
Some annuities include a free withdrawal feature. This may let you take a certain amount of your account value, like 10% of your account, without paying a surrender charge. This is often called a penalty-free withdrawal or a free withdrawal allowance.
A few important notes:
- Your contract may not offer this.
- The penalty-free withdrawal applies only to surrender charges, not IRS penalties.
- If you’re under 59½, tax penalties may still apply.
If you just need a small amount of cash, a free withdrawal might give you what you need without triggering additional fees.
Alternatives to Cashing Out
Before you fully cash out, consider these alternatives:
- Take only what you need. Sometimes a partial withdrawal is enough. This helps reduce surrender charges and keeps your annuity inforce.
- Use systematic withdrawals. Some contracts allow small, scheduled withdrawals that avoid extra fees and reduce the overall tax impact.
- Wait until the surrender period ends. If you’re close to the end — even by a year — you may be able to reduce or eliminate surrender charges entirely.
Your Next Steps
Cashing out an annuity early is an option, but it’s important to understand the costs before making a decision. Fees and penalties can add up quickly, and every situation is different.
Before you take the next step, consider reaching out for assistance. Visit WoodmenLife.org/Find/Rep to find a Representative near you. They are ready to learn about your situation and have a conversation about possible solutions.
Written by: Gary Peterson, Senior Copywriter
This blog is intended for general educational purposes only and may reference products, features, or options not currently offered by WoodmenLife. Availability of products and features can vary by company and state.
WoodmenLife, its employees, and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Read More
Annuities 101: Your Guide to Retirement Income
Understanding Annuity Taxes and How They Affect You
Qualified vs. Non-qualified Annuities
Immediate vs. Deferred Annuities: Which Is a Better Fit for You?
Understanding Fixed and Variable Annuities
Choosing Between Annuities and Life Insurance
WEB931
Share
[easy-social-share]
We’ve been helping to protect the financial future of families like yours, making a difference in hometowns across America and honoring our country since 1890. As a not-for-profit life insurance company, we put money back into the community. We’re here when you need us most.
Learn More About WoodmenLife
