Selling Annuities Early – What You Need to Know


Cashing out early or withdrawing funds pre-maturely from an annuity can be difficult and costly. Generally you cannot take distributions (cash payments) from an immediate annuity ahead of schedule. If you have an immediate annuity and need quick cash, you should consider selling the annuity.

With deferred annuities, withdrawing a small part or all of the funds inside the annuity is possible. You should be aware however that there may be tax penalties, and major charges paid to the insurance company.


When you take out funds from your annuity early you can expect the following:

  1. A 10% penalty on the on the taxable portion of the annuity is forfeited if you are under the age of 59 ½.
  2. The tax deferral benefits are in place to encourage long-term retirement savings, so the fee is similar to what you would pay on an early withdrawal from an IRA.
  3. In most cases, if you cash out early you will have to pay surrender charges. If your annuity carries a surrender fee you should try to wait until the fee no longer applies.

Earnings on annuities are considered ordinary income, so you must pay taxes on any earnings when you cash out your annuity. This is in addition to the 10% early withdrawal penalty.

Even if you are surrendering an annuity for cash in order to purchase another annuity, you will stay have to pay a penalty because the cash has passed through your hands.

Surrender Charges

A surrender charge is a pre-agreed fee for taking out money early from an annuity. Surrender charges generally start at 7% and decrease incrementally (usually by 1 or 2% per year) to zero. Depending on the particular annuity you buy, there may be exemptions to the annuity fees. For example, some annuities let you take out interest without exemption fees, or up to 10% of the value of the annuity without paying the surrender charge.

Converting from a Deferred Annuity to an Immediate Annuity

There are many other alternatives that don’t have as steep of a penalty. One popular option is to change your deferred annuity into an immediate one. By doing this you are not really getting rid of your annuity, you are just changing the type. There will still be some expenses with this option, but not nearly as much as if you closed out your annuity for a lump sum payment. With this option you will start to see an income from your annuity right away.


Don’t put money into an annuity that you think you will need A) prior to the age of 59 ½ or B) before the surrender charges for the annuity drop to zero.

This lesson is part of our Free Guide to Investing in Annuities.  Continue to the next lesson here.
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