Annuities are not the sexiest of investments. They're safe and stodgy and have higher operating costs, kind of like your grandfather's big old sedan. For some investors, an annuity is a useful vehicle for long-term retirement planning. However, if you've jumped into one without researching it properly, you might want to take your money back out at some point and reinvest it. It's an easy and straightforward process, but there are some financial pitfalls to be aware of.
Take out your annuity contract and read its surrender provisions. Most charge hefty surrender fees in the early years, but they dwindle over time. If you've held your annuity for 10 years or less, those fees should factor into your decision.
Review your annuity's most recent statement and see how much profit it contains. The amount you've contributed isn't taxable, but everything else is. If you're younger than 59 1/2, you'll pay an extra 10 percent penalty to the IRS on that taxable amount.
Do the math, and make sure you still want to withdraw the funds. You might find it more advantageous to keep the annuity intact.
Contact the company that issued your annuity contract and request surrender forms, or download them from the company's website if that option is available.
Complete the forms. Some companies might require you to have the signatures witnessed as a protection against fraudulent surrenders.
Submit your forms by registered mail or courier, or deliver them in person to one of the annuity company's offices. In most cases, you'll receive your check within a few weeks.
- Your annuity company might have the surrender forms delivered by an agent rather than mailing them. The agent's role is to make sure you understand the potential costs of surrendering your annuity. It's self-interest on the company's part, but it's also a useful reality check if you've skimped on your preliminary research.
- If you're OK with annuities in general but don't like your specific annuity product, you can often roll your existing annuity into a new one -- through a so-called 1035 transfer -- without taxation. There are fees associated with those transfers, however, and they can often wipe out much of the benefit you've gained by switching.
- If you're surrendering your annuity to free up funds for a short-term crisis, talk to your annuity company about options. You can often borrow or withdraw funds without surrendering the annuity or paying the corresponding fees.
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