When you purchase a deferred fixed annuity, you are entering in a long-term investment contract with your annuity company. The long-term nature of this investment is one of the reasons why fixed annuities offer a better return than other guaranteed investments. The downside of an annuity though is that it can be complicated and expensive to take money out. However, there are a few ways to get your money out of a deferred annuity.
Deferred Fixed Annuities
An annuity is divided between two stages: the accumulation stage and the payout stage. When an annuity is its accumulation stage, it is only investing your money for the future. How the money is invested depends on your contract. Fixed annuities give a guaranteed annual return whereas variable annuities invest in the stock market. When an annuity is in the payout stage, it starts paying out a portion of your account balance each month. You choose whether you want payments to last for a fixed period of years or for the rest of your life. A fixed deferred annuity is always in accumulation stage so without you making a change, your money is locked up.
Cancel the Contract
If you want to immediately take out the most money possible from your annuity, you should cancel the contract. While canceling the contract gets the most money, it is also the most expensive option. First of all, you might owe a penalty to the annuity company, known as a surrender charge. These penalties typically last for the first five to seven years of your contract. In addition, you could owe taxes to the IRS. The IRS will charge income tax on your annuity gains that tax year. In addition, if you are younger than 59 1/2, you will also owe an extra 10 percent early withdrawal penalty.
If you only need some of your money back, you might be able to make a partial withdrawal. Many contracts allow you to take a percentage of your money out each year without charging the surrender penalty. However, when you make a partial withdrawal you will still owe taxes if you take out some of your investment gains. You'll also owe the 10 percent penalty on any withdrawn gains if you are younger than 59 1/2.
Convert to Payout Stage
One last way to get money out of your deferred annuity is converting it to payout stage. When you switch to payout stage, your annuity will start making monthly payments for the time horizon you pick. This option gives you the smallest immediate payout but is the best for taxes and fees. If you keep your annuity at the same company when you take payments, the company will not charge surrender charges. In addition, the IRS does not charge the 10 percent penalty when you receive money from an annuity in payout stage, even if you are under 59 1/2.
Dylan Armstrong specializes in insurance, investing and retirement planning. He has also worked as a life and health insurance salesman and holds a Bachelor of Science in finance from Boston College.