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Because annuities are designed for the specific purpose of providing reliable income in retirement, the IRS and insurance companies have implemented financial penalties to deter annuity owners from making withdrawals beyond what the contract allows.

It’s crucial to consider the consequences from the federal government as well as from the issuing insurance company before you withdraw money from your annuity. If the consequences outweigh the benefits, you may want to consider selling a portion of your annuity payments instead.

Considerations for Taking Early Withdrawals

There are two things to keep in mind when considering taking early withdrawals from your annuity.

One is the surrender period stated in your contract and set by the insurance company, and the other is the U.S. tax code. Both entities have stipulations for your withdrawals, and there are exceptions and provisions that affect the standard penalties for each.

Withdrawals During the Surrender Period

If you take money out of an annuity, you may face a penalty or a surrender fee, also known as a withdrawal, or surrender, charge.

Annuity contracts include surrender charges to make up for the insurance company’s loss if you choose to withdraw before they can earn interest on your principal. The surrender charge typically decreases each year as the annuity contract matures and earns interest for the insurance company. Once the surrender period has expired, the surrender charge is zero.

According to the Insurance Information Institute, penalties are also meant to discourage annuity owners from using deferred annuities as short-term investments for quick cash.

Surrender periods often last six to eight years.

Many insurance companies allow annuity owners to withdraw up to 10 percent of their account value without paying a surrender charge. However, if you withdraw more than your contract allows, you may still have to pay a penalty — even after the surrender period has ended.

Some annuity contracts have surrender charge waivers for special situations, such as nursing home confinement or terminal illness.

Withdrawing Funds vs. Selling Payments

Withdrawing & SurrenderingSelling Payments
Taxes on money received
Surrender period (6–8 years)
Surrender charge
Discount applied
Early withdrawal tax penalty (10 percent)

It’s important to note that not every contract allows you to make free withdrawals. Review your contract and speak with someone from your insurance company if you have questions.

If your contract is too restrictive on withdrawals and you need cash immediately, you may be better off selling your payments at a discount to a company that purchases annuity and structured settlement payments.

Interested in selling some or all of your payments?
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IRS Tax Penalties for Early Withdrawals

Insurance companies aren’t the only ones with criteria for annuities.

The Internal Revenue Service has its own set of rules that guide the use and tax treatment of these products, and they have nothing to do with the criteria set forth by the insurance company.

You may be free to withdraw money at your discretion as far as the insurer is concerned, but if you are under the age of 59 ½, the IRS will charge you a 10 percent penalty.

According to IRS Publication 575, “Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59 ½ are subject to an additional tax of 10 percent.”

The 10 percent additional tax applies only to the taxable portion of the withdrawal, which you can determine using either the General Rule, if your annuity is nonqualified, or the Simplified Method, if your annuity is qualified.

This section of the tax code includes exceptions specific to certain types of annuity contracts, annuity start dates and withdrawals for certain major disasters — including, among others, Hurricane Harvey, Hurricane Irma, Hurricane Maria and the California wildfires in 2017 — so talk to a tax professional if you have questions about the tax consequences of early withdrawals from your annuity.

Tax obligations for a non-qualified annuity

Systematic Withdrawal Schedule

The IRS also imposes what are known as required minimum distributions after you reach a certain age and enforces a penalty for what it calls “excess accumulation.”

As an annuity owner, you may want to get ahead of the IRS and the insurance company by setting up a systematic withdrawal schedule.

A systematic withdrawal schedule allows you, the annuity owner, to customize your payment amounts and frequency. The drawback to a systematic withdrawal schedule is that you give up the guarantee of the lifetime payments that annuitization ensures.

The benefit you will gain from this withdrawal strategy is control over your finances as you take a more active part in your wealth management. On the flip side, though, you are forfeiting the financial security that annuities are meant to provide.


To guide you as you contemplate withdrawing funds from your annuity, we have included answers to some frequently asked questions.

Can you take all of your money out of an annuity?
You can take your money out of an annuity at any time, but understand that when you do, you will be taking only a portion of the full annuity contract value. You must account for taxes, surrender charges or discount rates depending on whether you choose to withdraw your funds or sell your annuity in its entirety for a lump sum of cash.
How can I withdraw money from an annuity without penalty?
The most clear-cut way to withdraw money from an annuity without penalty is to wait until the surrender period expires. If your contract includes a free withdrawal provision, take only what’s allowed each year, usually 10 percent. To avoid owing penalties to the IRS, wait to withdraw until you are 59 ½ and set up a systematic withdrawal schedule.
What is the free annuity withdrawal provision?
Many, but not all, insurance companies allow you to withdraw up to 10 percent of your funds prior to the end of the surrender period. Review your contract to determine whether your annuity includes a free withdrawal provision.
How are withdrawals from qualified annuities taxed?
Qualified annuity payments are taxed as ordinary income — not as capital gains — when the funds are distributed or withdrawn. If you take your money out before you reach age 59 ½, you will owe an additional 10 percent early withdrawal penalty to the IRS.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: July 12, 2021

6 Cited Research Articles

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  1. Insurance Information Institute. (n.d.). What are surrender fees? Retrieved from https://www.iii.org/article/what-are-surrender-fees
  2. Internal Revenue Service. (2018, December). Publication 939 General Rule for Pensions and Annuities. Retrieved from https://www.irs.gov/pub/irs-pdf/p939.pdf
  3. Internal Revenue Service. (2019). Publication 575 Pension and Annuity Income. Retrieved from https://www.irs.gov/pub/irs-pdf/p575.pdf
  4. Internal Revenue Service. (2020, January). Tax-Sheltered Annuity Plans (403(b) Plans). Retrieved from https://www.irs.gov/pub/irs-pdf/p571.pdf
  5. U.S. Securities and Exchange Commission. (2001, July 28). Fast Answers: Variable Annuity Surrender Charges. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/glossary/variable-annuity-surrender-charges
  6. U.S. Securities and Exchange Commission. (2015, February 19). Registration Statement. Retrieved from https://www.sec.gov/Archives/edgar/data/836687/000083668715000004/prefadvannpreeff1.pdf