Emergencies happen. You might need to buy a new roof, pay for college tuition or pay unexpected medical bills. Whatever the reason, you need to cash out an annuity. Annuities are a tax-deferred retirement vehicle sold by insurance companies. If you’re cashing it out early, you may face tax consequences. You may also be subject to surrender charges from the insurance company.
To cash out your annuity, you'll need to fill out a withdrawal or surrender form and turn it in to your agent. The agent will process your request and mail you a check.
An annuity is designed to be a long-term retirement product. Once you retire, you can annuitize the annuity, which means getting a guaranteed income for the rest of your life. You can designate a beneficiary to receive the annuity if you die before you start receiving the income.
Annuities grow in value over time. Depending on the type of annuity, it may earn based on interest rates or an index such as the S&P 500. Annuities can also be invested in mutual funds, which carry more investment risk. You can start an annuity with a lump-sum payment or by making periodic payments over time.
Annuities are tax-deferred, which means you aren’t taxed on the money the annuity gains until you withdraw it. You can begin taking an income at age 59 ½. If you withdraw money before age 59 ½, in addition to paying taxes on the gains you may be subject to a 10 percent early withdrawal penalty. You may also be subject to surrender charges on the withdrawal, depending on how long you’ve had the annuity. These are charges from the insurance company and can be up to 20 percent of the withdrawal amount.
Your insurance company may allow you to make an early withdrawal without a surrender charge, though. Usually, the amount you can withdraw is limited to 10 percent. Review your annuity policy language to see what options you have available or talk to your insurance company or agent.
Cashing Out Your Annuity
If you need to cash out your annuity, the first step is to contact your insurance company or agent. You will need to fill out a surrender form if you’re cashing out the entire annuity or a withdrawal form if you’re only taking out a part of your annuity. Return the form to the insurance company and follow up with them to ensure they received it. They will need to process the form, and then they will send out a check for the amount you’re cashing out. They may be able to withhold taxes on your behalf and send them to the IRS. You can also opt to pay the taxes you owe directly to the IRS at tax time.
- Withdrawal or income guarantees with variable annuities may allow you to make withdrawals up to six percent no matter how poorly your investments are doing without hurting your principal. This option is something to consider instead of taking a hit by fully cashing out your annuity.
- If you cash out within the first seven years of your annuity, you will be subject to a surrender charge. The charge is seven percent in the first year, less one percent each year thereafter.
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- The Disadvantages of a Tax-Deferred Variable Annuity
- How to Report a Roth IRA Surrender
- Withdrawing an Annuity Before 59 1/2