Getting Money Out of An Annuity

As life unfolds, you may find that the money you earmarked for an annuity would serve you better for a different purpose. Your buyer’s remorse might be caused by several factors. Perhaps your financial situation has changed and you are no longer able to make the required premium payments. Maybe the income you are receiving on a periodic basis is insufficient to cover your basic expenses. Or, perhaps you have several annuities you want to combine into one.

Getting money out of an annuity, beyond what is provided for in your regular payout schedule, should be researched thoroughly prior to purchase. Some contracts have provisions, which allow funds to be accessed in times of hardship. Hardships are usually defined as things such as hospitalization, life-threatening illnesses, permanent or extended nursing home stays, or other major calamities that have significant economic impact. It is important to know if your money is accessible, when, and at what cost.

If your buyer’s remorse kicks in quickly, you might be in luck. Once you purchase an annuity, regardless of the type, you get a “free look” period. The free look period is a defined window that gives you times to review your annuity contract and contemplate your purchase. You are entitled to a full refund of your premium payment if you terminate the contract with in the free look period.

The individual state insurance departments mandate free look periods. The precise terms of the free look can vary from company-to-company and state-to-state. Typically, however, the free look period is for ten days, but it can extend up to thirty days depending upon the sate/insurer/product.

Once the free look period elapses, getting your money out is more involved.

If you have an immediate annuity, your options to retrieve your money will likely be limited. Generally, these contracts are irrevocable. Once you put down your money in exchange for guaranteed payments, you cannot change your mind.

If you have a deferred annuity, there may be more options available to you. You may be able to get out of the contract wholly or partially. Keep in mind that you will pay a price to surrender the contract. You will likely have to pay surrender charges assessed by the issuing insurance company and possible tax penalties.

The following are some fees you may encounter:

• Surrender charges. The issuing insurance company imposes these expenses. The surrender schedule should be clearly spelled out in your annuity contract. For example, some insurers impose a 7% charge if surrendered in the first year, and 6% in the second year. The fee continues to decrease the longer you own the annuity, until it goes away altogether. Therefore, ideally, you will want to wait until the surrender period has elapsed before getting out of your contract.
• Tax penalties. The Internal Revenue Service will impose a 10 percent penalty on the taxable portion of your annuity. The penalty only applies if you receive the money before you are 59 ½ years old. The reason for the IRS penalty is this: tax deferral rules were designed to help Americans save for retirement. There are similar tax impositions for early withdrawals on other long-term savings instruments like IRA’s.
• You will be taxed at the ordinary income rate for all distributions made from your annuity. These taxes are in addition to the 10% tax penalty imposed for individuals under 59 ½ who receive distributions.
• If you surrender an annuity, accept the lump sum payment and then turn around to buy another annuity, you will still pay a tax penalty because you gained possession of the cash.

There may be a bright spot to the tax penalties you pay as a result of cashing out of your annuity. You may be able to deduct the loss on your income taxes.