Cashing In an Annuity: Updated Guide 2023

Article Summary:

Annuities give you the peace of mind that you’ll have a steady income during retirement. Most annuities allow you to withdraw money early — before retirement or during your surrender period. Early withdrawal may come with limits and fees. Regardless, you’ll be subject to taxes when you cash out an annuity. It may still be worth cashing out your annuity if it means you can move your money into assets with higher growth potential.

Life happens. You may need or want to access money in your annuity earlier than expected. Cashing out annuities can get complicated, but SuperMoney is here to help. Keep reading to learn about how to cash in annuities and the potential obstacles you might encounter when doing so.

Understanding annuities

An annuity is one way to set up financial security for your retirement. Annuities are agreements between you and an insurance company or broker. They’re often described as tax-deferred savings accounts with a life insurance company. Annuities benefit those who don’t have guaranteed income after retirement or are behind on retirement savings. They offer a reliable income source safe from volatility.

Like you would with other retirement savings accounts, you make periodic payments or a lump sum payment toward the annuity leading up to retirement. In turn, the provider promises some level of financial protection. The money grows inside the account over time until you’re ready to access it as a supplement to your retirement income.

Learn more about annuities with SuperMoney.

Pro tip

Early retirement planning will benefit you in the long run. Some experts recommend maxing out your other retirement accounts before purchasing an annuity. Other types of investment accounts offer higher returns and more flexibility with many of the same benefits. Weigh your options carefully because once you purchase an annuity, getting out of it isn’t always easy.

Can I cash out my annuity early?

Annuity funds are meant to be accessed upon retirement. However, you might need or want to withdraw your money early. Your annuity contract determines whether you can cash out early and what happens when you do. Yes, that’s right. Some annuity contracts don’t allow early cash-outs at all. Others allow it, but with time-dependent penalty fees.

Types of annuities

In general, there are two main categories of annuities: fixed and variable. Within each category, there are several types of annuities suited for different strategies. Annuities vary based on premium, growth, and payout. Different types of annuities offer different benefits.

Your type of annuity directly affects whether you can cash out early and whether you’ll face penalty fees. Therefore, it’s important to choose your annuity wisely and consult your provider about your specific contract terms.

As always, discuss your options with your provider and financial planning expert.

Surrender fees

Most annuity contracts include a surrender period. When you purchase an annuity, you agree to this surrender period during which you cannot access your funds without penalty. The surrender period is usually three to 10 years.

If you decide to withdraw money from an annuity during the surrender period, you’ll be subject to surrender charges. Surrender charge inversely relates to the time elapsed. As time increases, the surrender fee percentage decreases until reaching zero at the end of the surrender period. Some providers allow annuitants (beneficiaries of annuities) to withdraw 10% of their funds penalty-free.

Before cashing out your annuity, check your contract and consider whether what you plan to do with the money makes the potential surrender charge worth paying. For some people, paying the penalty will be well worth it. Putting the money in another investment vehicle could earn returns that far outcompete the annuity.

Annuities are complex. It’s not guaranteed that you’ll face surrender charges if you cash out early. It all depends on your annuity contract terms.

How to avoid surrender charges

The following scenarios may exempt you from surrender charges:
  1. Free look period
  2. Bail-out provision
  3. Disability
  4. Terminal illness
  5. Nursing home admission
  6. Death benefit
  7. 1035 exchange

Quick tip: read the fine print and get good advice

Read the fine print and consult a certified financial planner or accountant before buying an annuity. It’s important to understand the surrender period and associated fees before you tie your money up.

When to cash out an annuity

It’s not always possible to perfectly time your annuity. Moreover, some annuity contracts include strict payout terms. Assuming you want to cash in your annuity before retirement or on different terms than the contract, you’ll have some hoops to jump through — namely, surrender charges. If you can, try to wait out your surrender period as long as possible. The longer you wait, the more interest your money earns and the lower your surrender charge will be.

On the other hand, smart financial planning can make a surrender charge worth it. Depending on your age and financial goals, eating the surrender charge may be worth it to move your money from an annuity into another investment account. If you have the risk tolerance to invest somewhere with higher returns, the sooner you move your money, the better. Consult a professional financial advisor for investment guidance that helps you meet your financial goals.

Tax implications of cashing in annuities

Annuities offer tax-deferred growth, not tax-free. You’ll have to pay taxes on your annuity income one way or another.

Learn more about how annuities are given favorable tax treatment.

Annuity tax requirements

Topic No. 410 and Publication 575 of the United States Internal Revenue Service (IRS) list the following tax requirements related to annuities:
  • Annuity payments are fully taxable at your income tax rate if you didn’t contribute any after-tax amounts.
  • If you contributed any after-tax amounts to your annuity, your annuity income is subject to only partial taxes. You won’t have to pay taxes on the amounts for which you paid taxes before depositing into your annuity.
  • Early annuity payments before the age of 59½ may be subject to an additional 10% early-distribution tax.
  • Survivors or beneficiaries of an annuitant may be able to withdraw or rollover balances with some tax exemptions.

Pro tip: where to learn more

For more information about taxes, go straight to the source. IRS Publication 575 has in-depth information about how taxes affect your annuity income. Consult a CPA for further guidance on your unique situation.

How to cash in an annuity

So, you’ve decided you want to access some or all of your annuity funds. Before doing so, read through your contract, consult your provider, and make sure you’re aware of limits and penalties.

Here are your options for cashing in an annuity:

  • Withdrawals: Withdraw all or some of your annuity money. With most types of annuities, you can do this at any time. Depending on your contract, you’ll be subject to surrender charges and withdrawal limits.
  • Selling annuity payments: Instead of withdrawing money, you may be able to sell some or all of your annuity payments. It’s a great way to get immediate cash without facing withdrawal penalties.
  • Surrender: Fixed and variable annuities often offer surrenders. With this method, you’ll surrender your policy early for its cash value minus fees.
  • Loans: If you have a fixed annuity, you may be able to take out a loan against your annuity.
  • Waivers: Many of the exemptions listed above, including disability or nursing home admission, qualify as waivers. If you claim a waiver, you can cash in your annuity penalty-free.
  • Free look period: Many annuity providers offer a “free look period” during which the purchaser can consider the terms of the contract and back out with a full refund and no penalty charges.


What happens when you cash in an annuity?

When you cash in an annuity, you’ll receive your account balance back minus taxes and fees. Taxes and fees vary based on your contract and time frame.

What is the best way to cash out an annuity?

There isn’t one superior way to cash out an annuity. The best way varies from person to person. However, the best ways to avoid fees are to wait until the surrender period expires or sell your annuity payments.

Do you pay taxes when cashing out an annuity?

If you contribute pre-tax money to your annuity, yes, you will have to pay taxes when you withdraw money.

Is there a penalty for cashing out an annuity?

There are penalties for cashing out an annuity before the age of 59½ and before your surrender period ends.

When can an annuity be cashed out?

Many annuities can be cashed out at any time. However, annuity contracts come with limits and penalties for cashing out early. Some annuities require annuitants to meet certain criteria, like retirement or death, before cashing out.

How can I avoid paying taxes on annuities?

You can avoid paying taxes on annuity income by contributing post-tax money or Roth IRA funds to your annuity.

Key takeaways

  • Annuities are a stable vehicle for retirement savings that provide guaranteed income. Once you purchase one, it can be difficult to cash out penalty-free.
  • With some annuities, both fixed and variable, you can cash out at any time. However, you may be subject to surrender charges and additional taxes for withdrawing early.
  • Because most annuities are tax-deferred, you’ll have to pay income taxes on your annuity income.
  • When cashing out an annuity, you may be able to avoid surrender fees by applying for an exemption, selling your payments for cash, or taking out a loan against the annuity’s cash value.

More to consider: another option for ensuring sufficient retirement income

Have you heard of a reverse annuity mortgage? It can convert your home equity into cash. SuperMoney’s here to help you find out if you’re eligible and if a reverse mortgage can help you meet your financial goals.

View Article Sources
  1. About Publication 575, Pension and Annuity Income — IRS
  2. Publication 575…, Pension and Annuity Income — IRS
  3. Topic No. 410 Pensions and Annuities — IRS
  4. Useful background reading from personal finance, retirement planning, and wealth management sites — Various
  5. 5 Sources of Retirement Income — SuperMoney
  6. Annuity Payments Vs. Lump-Sum Payments: Pros and Cons of Each Payment Method — SuperMoney
  7. Behind on Retirement Savings? How to Reboot Your Retirement Plan — SuperMoney
  8. Best Shared Equity Agreements — SuperMoney
    If you own a home, a shared equity agreement could be another way to acquire needed funds during retirement.
  9. How Are Annuities Given Favorable Tax Treatment? — SuperMoney
  10. Securing Your Retirement With Fixed-Rate Annuities — SuperMoney
  11. What Is a Reverse Annuity Mortgage — How Does It Work? — SuperMoney