Yes, you can cash out an annuity, but the cost and process depend on what type of annuity you own and when you bought it

You can withdraw money from an annuity before you reach retirement age or before the contract's payout phase begins. However, most annuities charge a surrender fee — a penalty that reduces how much you actually receive. The fee is usually a percentage of your withdrawal and decreases over time. If you are under 59½, you may also owe a 10 percent federal tax penalty on top of regular income taxes, unless an exception applies.

The mechanics of cashing out depend on whether your annuity is still in the accumulation phase (you are still adding money or it is growing) or the payout phase (you are already receiving regular payments). Some annuities allow partial withdrawals without penalty; others do not. A few annuities have no surrender fees at all, though these are less common.

Key Takeaways

  • Most annuities charge a surrender fee if you withdraw money during the surrender period, which typically lasts 5 to 10 years from purchase.
  • Withdrawals before age 59½ usually trigger a 10 percent federal penalty tax in addition to regular income tax, with limited exceptions.
  • Some annuities allow you to withdraw a small percentage of your balance each year without penalty, often called a free withdrawal amount.
  • If you need cash urgently, selling your annuity to a third party (called a factoring company) is an option, but you will receive less than the contract value.
  • The contract itself spells out surrender fees, free withdrawal amounts, and any other penalties — your insurance company or agent can provide the exact terms.

Understanding surrender fees and the surrender period

When you buy an annuity, the insurance company sets a surrender period — a window of time during which you cannot withdraw your full balance without paying a penalty. This period typically lasts 5 to 10 years, though some annuities have shorter or longer periods. The surrender fee itself is usually highest in the first year and decreases each year you hold the contract.

For example, an annuity might charge a 7 percent surrender fee in year one, 6 percent in year two, and so on, until it reaches zero in year eight. If you withdraw $50,000 in year two and the fee is 6 percent, you lose $3,000 to the penalty. The remaining $47,000 is yours, but you will still owe income tax on the earnings portion of that withdrawal.

Some annuities include a free withdrawal amount — typically 10 percent of your balance per year — that you can take without triggering the surrender fee. This is a common feature in deferred annuities. Check your contract or call your insurance company to see if yours includes this option.

Tax consequences of early withdrawal

Withdrawing from an annuity before age 59½ usually means paying two separate taxes. First, you owe regular income tax on the earnings portion of your withdrawal. Second, the IRS charges a 10 percent penalty tax on that same earnings portion. The original money you contributed (called your basis) is not taxed again.

There are exceptions to the 10 percent penalty. You can avoid it if you are withdrawing because of a permanent disability, if you are taking substantially equal periodic payments over your lifetime, or if you are withdrawing after the annuity has entered its payout phase. Some states also allow penalty-free withdrawals in cases of financial hardship, though this varies.

If you are 59½ or older, you still owe income tax on earnings, but the 10 percent penalty does not explore. This is one reason many people wait until that age to take withdrawals — the tax hit is smaller.

Partial withdrawals versus full surrender

A partial withdrawal means taking out some of your money while leaving the rest in the annuity to continue growing. A full surrender means closing the contract entirely and withdrawing everything. The surrender fee applies to both, but the impact is different.

With a partial withdrawal, your remaining balance continues to earn interest or investment returns (depending on the annuity type), and the surrender period clock may reset or continue as before — check your contract. With a full surrender, you receive a lump sum, the contract ends, and you lose any future growth or may provide payments the annuity would have provided.

Some annuities are more flexible than others. Fixed annuities typically have stricter withdrawal rules, while variable annuities sometimes allow more frequent partial withdrawals. when ready annuities, which have already entered the payout phase, usually cannot be surrendered at all — you receive the payments the contract promises, nothing more.

Selling your annuity to a third party

If you need cash and the surrender fee is too high, you can sell your annuity to a factoring company (also called an annuity buyer). These companies purchase annuities and the future payment streams they provide. You receive a lump sum when ready, though it will be less than what the annuity is worth.

The discount depends on how much the buyer is paying for the right to receive your future payments. If your annuity promises $500,000 in payments over 20 years, a factoring company might offer you $300,000 to $400,000 today. The exact amount varies based on interest rates, your age, and how long the payment period is.

This route requires court approval in most states. The factoring company files a petition, and a judge must determine that the sale is in your best interest. The process typically takes 30 to 90 days. Be aware that factoring companies advertise heavily, and some charge high fees or offer unfavorable terms — compare offers from multiple companies before deciding.

Steps to cash out your annuity

Start by reviewing your annuity contract or calling your insurance company to find out the exact surrender fee, any free withdrawal amounts, and the current value of your account. Ask whether you are still in the surrender period and what the fee would be for a full or partial withdrawal. Request a written statement of these terms.

Next, decide whether a full or partial withdrawal makes sense for your situation. If you only need some of the money, a partial withdrawal might let you avoid the largest fees. If you are cashing out because you no longer want the annuity, a full surrender may be simpler, even if the fee is higher.

Contact your insurance company or agent and request a withdrawal form. You will need to provide identification and specify the amount you want to withdraw. Some companies process withdrawals within a few business days; others take longer. Ask about the timeline when you submit the form.

Finally, set aside money for taxes. The insurance company will withhold federal income tax (usually 10 percent) from your withdrawal, but this may not cover your full tax bill. Talk to a tax professional about whether you owe additional taxes when you file your return.

Alternatives to cashing out

Before you withdraw, consider whether keeping the annuity makes sense. If you are still in the surrender period and the fee is steep, waiting a year or two might save you thousands. If your annuity offers a may provide income stream in retirement, cashing out means losing that security.

Another option is a 1035 exchange, which lets you move money from one annuity to another without triggering taxes or surrender fees. This works only if you are switching to a different annuity contract, and it requires the insurance companies to process the transfer directly. A 1035 exchange is useful if your current annuity has poor terms or high fees and you want to move to a better product.

If you need access to your money but want to keep the annuity, some contracts allow you to take a loan against your balance. The loan does not trigger a surrender fee, though you will owe interest. This is less common than it used to be, but it is worth asking your insurance company about.

Frequently Asked Questions

What happens if I cash out my annuity before the surrender period ends?

You will pay the surrender fee stated in your contract, which is usually a percentage of the amount you withdraw. You will also owe income tax on the earnings portion of the withdrawal. If you are under 59½, you will owe an additional 10 percent federal penalty tax on those earnings unless an exception applies.

Can I avoid the surrender fee?

You can avoid it by waiting until the surrender period ends, by withdrawing only your free withdrawal amount (if your contract includes one), or by waiting until you are 59½ and the annuity has entered its payout phase. Some annuities have no surrender fees at all, though these are uncommon.

How long does it take to get my money after I request a withdrawal?

Most insurance companies process annuity withdrawals within 5 to 10 business days, though some take longer. Ask your insurance company for a specific timeline when you submit your withdrawal request. The company will withhold federal income tax before sending you the money.

Is there a difference between cashing out a fixed annuity and a variable annuity?

Fixed annuities typically have stricter withdrawal rules and higher surrender fees. Variable annuities sometimes allow more frequent partial withdrawals, but both types charge surrender fees during the surrender period. The specific terms depend on your individual contract.

What is a 1035 exchange, and should I do one?

A 1035 exchange lets you move money from one annuity to another without paying taxes or surrender fees. It makes sense if your current annuity has poor terms or high fees and you want to switch to a better product. Talk to a financial professional before doing an exchange, because you may lose features or guarantees in the old contract.