Can I Get My Money Out of an Annuity?

Annuity liquidity is more nuanced than the common framing of “your money is locked up.” Most deferred annuities offer multiple paths to access funds during the surrender period. Each has different costs, tax implications, and contract effects.

The five access methods

1. Free withdrawal (most common)

Most deferred annuities allow a 10% free withdrawal each year, starting in year 2. The amount is calculated as 10% of the contract value at the start of the year. No surrender charge or MVA applies.

Tax: the gain portion is taxable as ordinary income (LIFO for non-qualified; full payment for qualified). The 10% pre-59½ federal tax penalty may apply.

This covers most reasonable mid-contract income needs without any contract cost.

2. Full surrender

The contract is terminated. The surrender value is paid out, minus any surrender charge and adjusted by any MVA.

Cost: surrender charge per schedule (typically 9% to 0% depending on year), plus any MVA adjustment. Tax: full gain taxable in the year received.

This is the “exit” option. Appropriate when the contract is structurally wrong for the consumer’s situation and a better alternative is available.

3. Annuitization

The contract converts to a stream of payments. Surrender charges typically waive or partially waive at annuitization (depending on carrier).

Cost: usually no surrender charge. The trade-off is that annuitization is generally irrevocable. The principal becomes a stream of payments instead of a withdrawable balance.

Tax: each payment is split per the exclusion ratio (non-qualified) or fully taxable (qualified).

Annuitization is a one-way conversion. Modern annuities increasingly offer income riders that pay lifetime income without requiring annuitization, preserving access to the contract value.

4. Loans

Some annuities allow loans against the contract value. The consumer borrows up to a defined percentage (typically 50%) and pays interest to the carrier. The loan reduces the contract value until repaid.

Cost: loan interest, which varies by carrier and contract. The interest accrues against the contract.

This is uncommon for fixed and indexed annuities, more common for variable annuities and life-insurance-style contracts. Read the contract for specifics.

5. 1035 exchange

Tax-free exchange to another annuity (under IRC §1035). The contract value transfers to the new carrier without triggering tax on the deferred gain.

Cost: the original contract’s surrender charge may still apply. The new contract resets the surrender schedule (and may have its own surrender charges going forward). The producer typically earns a new commission on the receiving contract.

Tax: no tax event at the exchange. The basis transfers to the new contract.

A 1035 exchange is appropriate when:

• The original contract has structurally weak terms (low caps, limited features)
• A meaningfully better contract is available
• The new contract’s improvements outweigh the surrender charge and reset surrender period

It is not appropriate when:

• The “better” contract has higher commissions but no real consumer benefit
• The original contract is near the end of its surrender period
• The new contract’s surrender period extends the consumer’s lock-up needlessly

Edge cases: when access is easier than expected

Most annuity contracts include waivers that bypass surrender charges entirely:

Nursing home confinement. Most contracts waive surrender charges if the contract owner is confined to a nursing facility for 90+ continuous days.

Terminal illness. Most contracts waive surrender charges with documented terminal illness prognosis (typically 12 months or less expected survival).

Death. The death benefit pays out without surrender charges or MVA.

These waivers are universal in modern fixed and indexed annuity contracts. Read the brochure to confirm specifics.

Edge cases: when access is harder

Some contracts have surrender period extensions beyond the standard 7-14 years. Bonus-heavy FIAs in particular may have surrender schedules running 14 years or more. The premium bonus is funded by the longer surrender period; the consumer should understand they have committed to a long lock-up in exchange for the bonus.

Two-tier annuities (largely discontinued) have surrender values materially lower than annuitization values. These are rare today but exist in legacy contracts.

A reasonable liquidity strategy

For most retirees:

• Keep 6-12 months of essential expenses in cash (not in any annuity)
• Use the annual 10% free withdrawal for incremental income needs
• Don’t put more than 50% of liquid assets in any single annuity
• Don’t put any money in an annuity that may be needed for non-annuity purposes during the surrender period

Within those constraints, the contract’s surrender schedule rarely becomes binding. The consumer who never tries to surrender never pays the surrender charge.

For deeper context on charges, see the surrender charges article.