What to Do When a Fixed Annuity Matures

Annuity distributions are taxable.

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A fixed annuity is an interest-bearing life insurance product. An annuity typically has a term length of at least four years, during which it grows on a tax-deferred basis. Annuities are designed to provide you with an eventual income stream. You have several other options to choose from when your fixed annuity matures, including redeeming it, renewing it and annuitizing it.


You'll pay income tax if you redeem your annuity, but you'll be able to defer income tax payments if you renew or annuitize your annuity.

Annuitize Income Stream

Annuitization involves exchanging a lump sum of cash for a pension-style income stream. You can annuitize your contract at maturity. Your monthly income payments are based on the value of your annuity at maturity. Many insurance providers allow you to choose between several different payment options.

For the highest monthly payment, you can choose a limited term payout, which may involve receiving income for five or 10 years. Your payments are smaller if you choose to convert your annuity into a lifetime income stream. Payments are smaller still on a jointly owned annuity because the payments continue until the last owner dies.

Renewing Your Annuity Contract

Annuity withdrawals are fully taxable. You can delay the annuitization process and the resulting taxes by renewing your annuity. Insurance providers typically provide you with a number of different renewal options. The renewal interest rate and term may differ from your original contract since annuity rates are sensitive to interest rate fluctuations.

You can also roll your matured annuity into a different type of deferred annuity, such as a variable or a fixed annuity. Both products offer returns based on market indexes or mutual funds rather than a flat interest rate. Such products prove popular when interest rates are low.

Exchanging for Another Annuity

If you do not like the annuity offerings available from your current provider, you can move your funds to another insurance firm. Under Section 1035 of the federal tax code, you can arrange a tax-free contract exchange. During this process, you do not have direct access to the funds. You sign a purchase contract for a new annuity and your current provider disburses the matured contract proceeds to the new provider.

So-called "rate shoppers" routinely move funds from one company to another in search of the highest yield. You can also use 1035 rules to exchange one life insurance policy for an annuity but you cannot use this provision to replace an annuity with a life insurance contract.

Redeeming in Lump Sums

At maturity, you can redeem your fixed annuity, in which case you receive a fully taxable lump sum. If you are not yet 59 1/2 years of age, you also pay a 10 percent penalty on the interest and any portion of the principal that has not previously been taxed. You might opt to cash in the contract and pay the taxes if you need access to the lump sum and do not want to tie it up in another contract or convert it into an income stream.

Once you withdraw the cash, you can deposit it into an interest-bearing bank account, buy stocks, bonds or a variety of other instruments. You could also use the cash to pay down debt or just deposit it into your checking account.