How to Receive a Lump Sum for Annuities

by Gregory Gambone Google

    The steps required to close your annuity and take the money in a single lump sum are simple. The potential consequences of making that decision, however, are not. You are free to surrender your account at any time and nobody can stop you, but it's a good idea to consider how both your present and future financial stability will be affected by the lump sum.

    Step 1

    Get the paperwork. Contact your annuity provider's customer service department and request withdrawal forms. Most companies will mail the paperwork to your home address, but many have the ability to fax or e-mail them as well.

    Step 2

    Calculate your net surrender value. Most annuities contain provisions allowing the insurance company to keep a percentage of your contract's value if you close your account too soon. These surrender charges typically range from 7 to 10 percent and decrease by 1 percent annually until finally disappearing entirely. If you are terminating your annuity within the surrender period, review your contract documents to determine the surrender penalty, then subtract the fee from your account value.

    Step 3

    Determine your income tax liability. Once you receive your lump sum withdrawal, the untaxed portion must be added to your earnings for the year. If your annuity is qualified, held in an IRA or employer-sponsored retirement plan, all of the money is taxable upon withdrawal. If your annuity is non-qualified -- purchased with after-tax savings -- only the growth is taxable, while the remainder is simply a return of your contributions.

    Step 4

    Calculate any IRS penalties. Money inside retirement plans, including annuities, must remain untouched until you are at least 59 1/2 years old. If you withdraw money before this age the IRS will penalize you 10 percent for the early withdrawal. This penalty is separate from the ordinary income taxes due and any surrender charges imposed by the insurance company.

    Step 5

    Choose your tax withholding options. Most insurance companies will offer to withhold a portion of your annuity value in anticipation of the tax liability resulting from the lump sum withdrawal. In some cases you can also opt to request additional withholdings for anticipated state income taxes.

    Step 6

    Submit the paperwork. Fill out the account closure forms in full, signing each section where appropriate. Mail or fax the documents back to the insurance company and call the customer service department to confirm receipt.

    Tip

    • Consult with a professional tax advisor before submitting your paperwork to ensure you understand exactly how the lump sum from your annuity will impact your income tax liability.

    Warning

    • If the taxable portion of your annuity is large enough, terminating the account could increase your earnings enough to raise you into a higher income tax bracket.

    Photo Credits

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    About the Author

    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.

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