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How Annuity Withdrawals Work

What is an annuity withdrawal?

An annuity withdrawal is when an annuity owner (a/k/a an “annuitant”) chooses to withdraw funds from his or her annuity. If not done properly or within permissible timelines, the annuitant can be liable for certain penalties and fees.

When can someone withdraw money?

Withdrawals are permitted once the annuitant reaches 59 ½. If withdrawals are made before this age, then certain penalties will apply.

What are the penalties?

If withdrawals are made before age 59 ½, the annuitant will be liable to the IRS for a 10% penalty and will also be responsible for paying income tax on the amount withdrawn. Also, the insurance company will usually require the annuitant pay a so-called “surrender charge” for an early withdrawal. The amount of the surrender charge depends on the timing of the withdrawal.

How are taxes applied?

Income tax is owed on the amount withdrawn if the annuitant makes the withdrawal before the age 59 ½. Depending on the circumstances, the withdrawal can be taxed as ordinary income.

Are there options other than early withdrawal?

Yes. Rather than take an early withdrawal, an annuitant can sell all or part of an annuity to a company in exchange for a lump sum amount. There are no surrender fees associated with selling an annuity because the annuitant is effectively selling his/her right to receive future payments for a certain period of time. The amount of the lump sum payment will depend on a number of facts.