How to Cash in an Annuity Early

The IRS taxes your annuity gains when you take them out of your contract.

The IRS taxes your annuity gains when you take them out of your contract.

If your savings are locked up in an annuity, you aren't trapped. You have a few options for cashing out your money before the end of your contract. However, any move will end up costing you in some combination of taxes and fees. Your best option depends on how much money you need and the structure of your contract.

Full Surrender

If you need all your money cashed out, you should make a full surrender. This completely cancels your annuity. You get your money back and the contract is over. However, this is the most expensive option. Annuity companies charge a surrender charge if you cancel too early, usually within five to seven years after the start of your contract. This fee will be deducted from your payout. In addition, you could owe taxes to the IRS. You get your deposit back tax-free but all your gains are fully taxable. In addition, if you are younger than 59 1/2, you'll owe an extra 10 percent penalty on the gains.

Partial Surrender

Some annuities also offer a partial surrender. You get some of your money back without ending the contract. Your annuity company might lower or waive its surrender charge on a partial surrender. This information is listed in your annuity contract. However, you'll still could owe tax on the partial surrender. The IRS considers that your withdrawal comes out of your annuity gains first. If your contract made money, you'll owe tax plus the 10 percent penalty on the partial surrender. Once you've taken out all your gains, you'll start making tax-free withdrawals from your deposit.

Annuity Payments

You can also start taking payments from your annuity. This works well if you need a little extra income extra month. With this option, your annuity company will give you monthly payments for a certain period of time. You can choose between different periods of years or choose payments for the rest of your life. Annuity companies usually don't charge a surrender fee on this option because you keep your money with them. You will owe tax on the payout of your investment gains, but won't owe the 10 percent penalty with this option.

Annuity Exchange

One last way to move your money is through a contract exchange. Annuity rates are always changing. If you found an annuity with a better deal, you can move your money into the better one. The IRS does not tax contract exchanges because you aren't taking any money out; you're just changing plans. However, your annuity company could charge the surrender fee, especially if you move your money to another company. Check your plan contract to see if you'll owe a surrender charge on an exchange.

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

Photo Credits

  • Thinkstock/Comstock/Getty Images