Can I Borrow Against My Deferred Annuity?

An annuity loan gives you quick access to tax-free money. Images

An annuity is a contract that allows you to exchange a sum of money for a series of payments that can continue through a set period or for the rest of your life. You can even buy annuities that continue making the same or different payments to your beneficiaries. The borrowing rules depend on the type of annuity.

Nonqualified Annuity

A nonqualified annuity is a contract that resides in a taxable account rather than in a tax-sheltered one. You build up the cash value of a deferred annuity during the accumulation phase. On the annuity date, the contract provider swaps your cash value for a stream of payments. This begins the distribution phase. Most nonqualified annuities allow you to borrow money during the accumulation phase. These loans don't trigger taxes or penalties. The contract sets out the payback period and interest rate. Any interest you pay increases the cash value. You can also pledge the annuity as collateral for a loan.

IRA Annuity

An annuity inside an individual retirement account or employer pension plan is “qualified.” You can’t borrow from an IRA annuity. If you do so, the Internal Revenue Service will dissolve your IRA and collect taxes on the fair market value of the assets. It might also collect a 10 percent penalty if you’re younger than 59 1/2. If you pledge part of your IRA annuity, the IRS will treat the pledged amount as a distribution.

Pension Annuity

Your pension plan annuity may allow loans. The IRS limits the amount you borrow to the greater of $10,000 or 50 percent of your vested account balance. However, your pension annuity loan can’t exceed $50,000, and you must repay the loan in equal installments over a period no greater than five years. If you use the loan to help buy your main house, you might be able to stretch your payback period beyond five years. The plan might suspend repayments when you are on active military service.


Annuity contracts normally set a surrender fee that you must pay if you cash out your annuity during some part of the accumulation phase. The amount you can borrow from your annuity is reduced by its surrender fee. Borrowing from your annuity rather than cashing out some portion lets you avoid surrender fees, taxes and penalties. However, the money you borrow will not accumulate earnings, and that can reduce your annuity distributions.