How to Surrender an Annuity

Annuities have their uses, but surrendering one can be very costly.
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Some investments are like planting radishes: a few weeks later you've got your payoff, and can move on to something else. Others are more like planting an apple tree. They are long-term investments, and uprooting them to start fresh can be counterproductive. Annuities fall into the second category. They're a tax-sheltered product, intended for long-term investments and retirement income. You can withdraw or "surrender" some or all of the investment from your annuity in a time of need, but you'll probably pay a pretty heavy price.

Step 1

Contact the company that issued your annuity contract and request any forms you'll need to surrender your annuity in whole or in part. They might mail them, or a representative might deliver them to answer your questions.

Step 2

Review the company's surrender fees. They typically go down with each year you stay invested, much like the commission fees on a back-end loaded mutual fund. However, they can be very high in the early years: over 20 percent, in some cases.

Step 3

Calculate the tax impact of your withdrawal. The money you take out becomes taxable income at your currently applicable rate for ordinary income. If you are below 59 1/2 in age, the IRS will charge a special tax amounting to 10 percent of the amount you withdraw.

Step 4

Total the cost of surrendering your annuity, including both the issuing company's charges and the tax impact. If you need a set amount of money to meet a specific need, increase the withdrawal to offset these costs.

Step 5

Submit the forms to your annuity company, if you still feel it to be in your best interest. Your annuity contract should explain how long this process takes.

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