Because annuities are retirement investment vehicles, you're supposed to leave the money alone until you actually retire. Withdrawing it too early can lead to hefty fines from both the insurance company and the IRS. However, neither the company nor Uncle Sam will stand in your way if you really want the money, and you can have as much of it as you want in a matter of weeks.
Closing the Account
Getting your hands on as much of your annuity money as possible, as quickly as possible, requires closing the account and taking a lump-sum distribution. If you submit the necessary paperwork to terminate your annuity, the insurance company should cut you a check within a week or two. You'll receive whatever money was in your annuity, minus any fees or penalties that might be applied.
If you want to start using the money in your annuity to supplement your regular income without closing the account, you can annuitize it. At your request, the insurance company will convert the value of your annuity into a stream of regular monthly payments that can last for the rest of your life. Once you submit the forms, it's only a matter of weeks before the conversion is finalized. You can begin receiving these payments as early as the following month.
Almost every annuity allows owners to take a small portion of the money each year without penalty. Typically, you can withdraw up to 10 percent of your account value and not get hit with extra fees or charges from the insurance company. Requesting your free withdrawal is as simple as completing the paperwork and waiting for a check, which usually arrives within two weeks.
Closing your annuity account entirely or taking a partial withdrawal of more than 10 percent in any given year might result in surrender charges from the insurance company. Most annuities allow the company to keep up to 10 percent of the money if you withdraw it within the first several years. Surrender fees typically decrease by 1 percent annually until eventually disappearing, so anything more than your penalty-free amount will be reduced by the corresponding penalty charge.
The portion of the money you receive from your annuity that has yet to be taxed will be added to your gross earnings for the year. If your annuity is in an IRA, the entire account is taxable. However, if your annuity was funded with after-tax savings, only the growth is taxable and the rest is simply a return of your contributions. Partial withdrawals are considered to come from the growth first, so the entire amount you receive is taxable, unless the distribution is more than the total earnings.
Early Withdrawal Penalties
Withdrawing money from your annuity before you're 59 1/2 years old will result in penalties from the IRS. You'll get hit with a 10 percent early withdrawal charge on any untaxed money you take from your annuity. These penalties are separate from the insurance company's surrender charges and the ordinary income taxes. Uncle Same consider waiving the early withdrawal penalties only in specific circumstances: terminal illness, first-time home purchase, college expenses and permanent disability.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.