What Charges Could You Face When Withdrawing Money from an Annuity?

Annuities are built for long-term money. Taking money out early, or the wrong way, can mean charges and taxes. Here’s what to know before you withdraw.

1. Surrender charges

Most deferred annuities have a surrender period, a set number of years after you buy the contract. If you take out more than the allowed amount during that time, the insurance company charges a percentage of the excess withdrawal. That’s the surrender charge.

The charge usually goes down each year until it reaches zero. A schedule might look something like this example:

Contract year	Example surrender charge
1	7%
2	6%
3	5%
4	4%
5	3%
6	2%
7	1%
8+	0%

This is a made-up example for illustration only. Every contract has its own schedule, and some surrender periods are longer. Always check your contract.

2. The free-withdrawal amount

Many annuities let you take out a certain amount each year without a surrender charge, often a percentage of the contract value. Take more than that and the charge kicks in. Know your free-withdrawal amount before you need it.

3. Market value adjustment (MVA)

Some annuities include a market value adjustment. If you withdraw more than the free amount during the surrender period, the value may be adjusted up or down depending on how interest rates have changed since you bought the contract. Generally, if rates have risen, the adjustment can reduce what you receive; if rates have fallen, it may increase it. Not every contract has an MVA, so check yours.

4. Federal income taxes

Annuities grow tax-deferred, which means taxes are due when you take money out. For an annuity bought with after-tax money, withdrawals are generally treated as coming from earnings first, and earnings are taxed as ordinary income. For annuities inside an IRA or other retirement plan, withdrawals are generally fully taxable. Tax rules can be complex, so talk with a tax professional (IRS Publication 575: Pension and Annuity Income).

5. The early-withdrawal tax before age 59½

According to the IRS, most distributions from nonqualified annuity contracts and qualified retirement plans taken before age 59½ are subject to an additional 10% tax, unless an exception applies (IRS Publication 575: Pension and Annuity Income). This is on top of regular income tax, and it applies even if there’s no surrender charge.

6. Rider fees and lost benefits

If your annuity has an optional rider, such as an income rider, it may carry an annual fee. Taking withdrawals larger than the rider allows can reduce or even end the rider’s benefits. Ask before you withdraw.

Exceptions to know about

Many contracts waive surrender charges in certain situations. Depending on the contract and state, these may include:

• Death of the owner or annuitant
• Required minimum distributions from a qualified annuity
• Confinement to a nursing facility or a terminal illness, if the contract includes that waiver
• Choosing to annuitize (turn the contract into income) after a certain period

These waivers vary a great deal. Read the contract or ask the insurer.

How to avoid surprises

• Keep an emergency fund outside your annuity
• Don’t put money you may need soon into a contract with a long surrender period
• Write down your surrender schedule and free-withdrawal amount
• Call the insurer for a withdrawal quote before you request money
• Talk to a tax professional before a large withdrawal
• Be careful about moving from one annuity to another. A new contract usually starts a new surrender period

Before you buy

The best time to understand withdrawal charges is before you sign. A suitable recommendation should consider how soon you might need the money. If you can’t comfortably leave the money alone for the whole surrender period, an annuity with a shorter period, or no annuity at all, may be the better choice.

A simple example

Here’s a made-up example. Say someone has an annuity worth $100,000 in year two, with a 10% free-withdrawal amount and a 6% surrender charge that year. They could take $10,000 without a surrender charge. If they took $20,000, the extra $10,000 above the free amount would face a $600 surrender charge, plus any market value adjustment and income taxes that apply. Your contract’s numbers will be different. This just shows how the pieces fit together. Hypothetical example for illustration only, not a guarantee.

A few minutes of reading now can save a lot of money and frustration later.

Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products, not bank products, and are not FDIC insured. If you’d like help reading your contract or comparing options, I’m happy to help.

This article is for general educational purposes only and is not legal, tax, or financial advice. Coverage, pricing, and availability vary by age, health, state, and carrier.

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