Having a large amount of money in your retirement account is a good thing, unless you happen to need access to some of it. Then you can feel like a shipwreck survivor, going thirsty on a sea of undrinkable water. Long-term savings vehicles, such as deferred annuities, are subject to fees and taxation penalties if you remove your money, but it's sometimes possible to borrow without undue stress.
Borrow Against Your Annuity
Your annuity has a reasonably concrete value, consisting of the dollar amount currently in your account minus the surrender fees and tax liabilities you'd face if you withdraw from the account. Many institutions are willing to consider your annuity as collateral for loans up to the total surrender value and sometimes more, depending on your credit history and other assets. Be cautious, however, and scrutinize the loan carefully to be sure you understand its conditions. If your annuity is the collateral, it's prudent to restrict your loan to the amount your annuity will cover. That way if you suffer a catastrophic loss or illness, your loan won't expose you to additional hardship.
Borrow From Your Annuity
A second option that's open to many annuity owners is borrowing directly from the annuity itself. This isn't an option in every annuity contract, but in most cases the insurer will allow you to borrow up to half of the annuity's value without penalty. You will need to pay the money back, and the insurer will charge you interest on the amount you've borrowed. Compare that rate to what you can get from third parties using the annuity as collateral, and then decide which approach is more advantageous. Borrowing from the annuity is usually a simpler process, requiring only a form from the insurer.
Withdraw From Your Annuity
In a worst-case scenario, you might find yourself unable to borrow from either a third-party lender or the insurer holding your annuity. In that case, your options might be limited to making a full or partial withdrawal from the annuity. This is a serious decision because you'll be liable for either some stiff fees from the insurer or a potentially serious hit on your income taxes. Because your contributions are made with after-tax dollars, withdrawals of contributions usually are not taxable. Unfortunately, every penny you've gained is taxable as ordinary income. If you're not yet 59 1/2 years old, you'll pay the IRS an additional 10 percent penalty. It adds up quickly.
Pros and Cons
Each of these alternatives has its pros and cons, depending on your circumstances -- including how badly you need the money. Any loan can be problematic if you don't pay attention to the contract language. Third-party loans will generally give you the full value of your annuity, but their terms might not be favorable. Loans from your annuity can often be inexpensive and flexible on repayment, but they have an upper limit. Taking money out of the annuity also slows the growth of your retirement funds. Withdrawing from the annuity or surrendering it entirely can be very costly, so consider the math carefully before you commit to that option.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.