How to Withdraw Annuities Without Penalty

By: Fred Decker

Your insurance broker can help explain the potential penalties for withdrawal.

Jupiterimages/Comstock/Getty Images

Annuities are unusual products, combining features of both investment funds and life insurance. They're sold by the life insurance industry, and outsiders are quick to decry their relatively high costs and often-substandard returns. Most crucially, it can be expensive to retrieve your money from an annuity if you decide to change your financial direction. Annuities are expensive to issue, and insurers usually cover their costs through a set of stiff penalties. There are also potential tax penalties.

Step 1

Review your annuity contract, and look at the clause covering surrender fees. Usually they start high, then decline over a period of years. To withdraw without paying surrender fees, wait until they expire before taking your money. In most contracts, that's seven to nine years.

Step 2

Take your money piecemeal. Many annuity contracts allow their owners to withdraw as much as 10 to 15 percent annually without paying surrender fees or other penalties. Some contracts also contain provisions for hardship withdrawals.

Step 3

Wait until you're 59 1/2 to withdraw from your annuity. If you're younger, the IRS will levy a 10 percent penalty on the taxable portion of those funds, in addition to charging any regular taxes due on the money.

Step 4

Purchase a "no-surrender" annuity. These often have fewer features than conventional annuities and might have higher administrative costs, but they allow withdrawal without surrender fees. You'd still face any applicable tax liabilities.


  • Most annuities are purchased with after-tax dollars, so you wouldn't be taxed again on that portion of any withdrawal. However, any increase in your annuity's value is taxed as ordinary income rather than at the lower rate for capital gains. For taxation purposes, your withdrawals are all treated as taxable until the total amount of your investment gain has been withdrawn. This is taxation rather than a penalty, but it should be considered before making any withdrawals.


About the Author

Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.

Photo Credits

  • Jupiterimages/Comstock/Getty Images

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.