You can use your annuity to buy a house, but whether that’s a smart move depends on your age, the type of contract you own, and how long you’ve held it. If you’re under 59½ and pull a lump sum from a standalone annuity, expect to lose 20% to 40% of the withdrawal to federal income tax, a 10% early-withdrawal penalty, state tax, and surrender charges from the insurance company. The one narrow break — a penalty-free withdrawal of up to $10,000 for a first-time home purchase — applies only to annuities held inside an IRA, not to standalone contracts.
Qualified vs. Non-Qualified Changes Everything
Before you look at any exception or workaround, find out which kind of annuity you own. A qualified annuity lives inside a tax-advantaged retirement account: a 403(b), a 401(k), or an IRA under Internal Revenue Code Section 408. Contributions went in pre-tax, so the entire distribution is taxable as ordinary income when it comes out. The early-withdrawal penalty for these accounts falls under Section 72(t), which carries a longer list of exceptions, including the first-time homebuyer break for IRAs.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
A non-qualified annuity was purchased with money you already paid taxes on. The early-withdrawal penalty for these contracts falls under Section 72(q), which has fewer exceptions and no first-time homebuyer carve-out.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The IRS also treats withdrawals from non-qualified contracts on an earnings-first basis: gains come out before your original principal, so the taxable hit is front-loaded. Only after you’ve withdrawn all the earnings do you reach your tax-free cost basis.3Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
That single distinction drives most of what follows. IRA-based annuity? You have access to the homebuyer exception and other 72(t) exceptions. Standalone non-qualified contract? You’re working with the shorter 72(q) list, and buying a home isn’t on it.
What Pulling Money Out Actually Costs
An early withdrawal can involve up to four separate costs layered on top of each other. Knowing how they stack is the difference between a workable plan and a nasty surprise at tax time.
The 10% Federal Penalty
Under Section 72(q) for non-qualified contracts and 72(t) for qualified accounts, the IRS adds 10% to your tax bill on the taxable portion of any distribution taken before age 59½.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most homebuyers under 59½ pulling a lump sum from a non-qualified annuity won’t qualify for any of the exceptions.
Ordinary Income Tax
The taxable portion is added to your other income for the year and taxed at your marginal rate. For 2026, individual rates run from 10% on the first $12,400 of taxable income up to 37% on income above $640,600.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill A large withdrawal on top of your salary can push part of the distribution into the next bracket, and that bracket-jump effect is where most homebuyers underestimate the true cost.
State Income Tax
Most states tax annuity distributions as ordinary income. Rates run from 0% in states with no income tax to as high as 13.3% in the highest-taxing states. Partial exemptions for retirement income exist in some states, but they typically don’t help someone under 59½ pulling a lump sum.
Surrender Charges
Insurance companies impose their own penalties during the surrender period, usually the first five to ten years of the contract. Charges often start around 7% to 8% in year one and decline by roughly one percentage point per year until they reach zero. A homebuyer withdrawing $50,000 from a three-year-old contract with a 5% surrender charge would lose $2,500 to the insurer before taxes come into play. Your contract’s declaration page or schedule of charges shows the exact percentages.
Withholding at the Source
Your insurer withholds federal income tax before sending the check. The default rate for non-periodic distributions from non-qualified annuities is 10%. For eligible rollover distributions from qualified plans, mandatory withholding is 20% of the taxable amount.5Internal Revenue Service. Topic No. 410, Pensions and Annuities Withholding isn’t an extra tax; it’s a prepayment applied to your return. But it does mean you’ll receive less cash upfront than the gross amount you requested. If you need a specific dollar figure for the down payment, ask for more than that to cover the withholding.
What This Looks Like in Practice
Say you’re 45, earn $80,000 a year, and pull $50,000 from a non-qualified annuity that’s entirely gains (common under earnings-first treatment). You’d face roughly $12,000 in federal income tax at the 24% marginal rate on the portion pushing you into that bracket, a $5,000 early-withdrawal penalty, and possibly $2,500 in surrender charges if you’re still in the surrender window. State income tax could add another $1,500 to $5,000 depending on where you live. That’s $21,000 to $24,500 in total costs on a $50,000 withdrawal, meaning you’d need to pull $70,000 or more to net $50,000 for a down payment.
The First-Time Homebuyer Exception (IRA Annuities Only)
The IRS waives the 10% early-withdrawal penalty on up to $10,000 in distributions used for a first-time home purchase, but only from IRAs. The exception lives in Section 72(t)(2)(F) and does not apply to 401(k)s, 403(b)s, or standalone non-qualified annuity contracts.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions If your annuity is held inside an IRA, you can use it. If it’s a non-qualified contract you bought directly from an insurance company, this exception doesn’t exist for you.
The $10,000 is a lifetime cap, not annual. It can go toward acquisition costs, construction, or normal closing costs for a principal residence, and the money must be spent within 120 days of the distribution.7Legal Information Institute (LII) / Cornell Law School. Definition: First-Time Homebuyer from 26 USC 72(t)(8)
“First-time homebuyer” doesn’t mean you’ve never owned a home. The IRS defines it as someone who hasn’t had an ownership interest in a principal residence during the two years ending on the acquisition date. Your spouse must also meet this test if you’re married. And the home doesn’t have to be for you — the exception also covers purchases for a spouse, child, grandchild, or parent.7Legal Information Institute (LII) / Cornell Law School. Definition: First-Time Homebuyer from 26 USC 72(t)(8)
One caveat: the exception only removes the 10% penalty. You still owe ordinary income tax on the distribution from a traditional IRA-based annuity.
Ways to Get the Money Out
Partial Surrenders
The most common route is a partial surrender: withdrawing a specific dollar amount while keeping the rest of the contract in force. Most annuity contracts allow up to 10% of the account value each year without triggering a surrender charge from the insurance company. That free-withdrawal allowance won’t help you dodge taxes or the IRS penalty, but it does eliminate the extra insurer-imposed layer. Check your contract for the exact percentage and whether it resets each year.
Loans Against a Qualified Plan
If your annuity sits inside a 401(k), 403(b), or similar employer-sponsored plan, you may be able to borrow against it rather than withdraw. The IRS caps plan loans at the lesser of 50% of your vested balance or $50,000. Repayment normally runs five years, but loans used to purchase a primary residence get an extended window.8Internal Revenue Service. Retirement Topics – Plan Loans Because you’re borrowing rather than distributing, there’s no income tax and no 10% penalty as long as you repay on schedule. Miss payments and the outstanding balance converts to a taxable distribution.
IRA-based annuities cannot offer loans. Most standalone non-qualified contracts don’t offer a true loan feature either, though some insurers will let you borrow against the contract value using it as collateral. That’s a different arrangement, with terms that vary widely. Read the fine print before assuming your non-qualified annuity includes a borrowing option.
Substantially Equal Periodic Payments
Both qualified and non-qualified annuities offer one penalty-avoidance method that works at any age: substantially equal periodic payments, or SEPP. Under 72(q)(2)(D) for non-qualified contracts and 72(t)(2)(A)(iv) for qualified accounts, you can take a series of roughly equal payments based on your life expectancy without owing the 10% penalty.9Internal Revenue Service. Determination of Substantially Equal Periodic Payments The catch is the commitment. Once you start, you have to continue for at least five years or until you reach 59½, whichever is later. Modify the schedule early and the IRS retroactively imposes the 10% penalty on every distribution you took, plus interest. SEPP works best if you’re within a few years of 59½ and need steady income, not a single lump sum for a down payment.
What a Withdrawal Does to Your Remaining Benefits
The damage doesn’t end with the tax bill. If your annuity includes a guaranteed lifetime withdrawal benefit rider, taking more than the annual guaranteed amount triggers a proportional reduction to the income base. That reduction is permanent. Your future guaranteed income drops and never recovers, even if the account value later rebounds.10New York Life Annuities. Withdrawal Riders Guide
Some income annuity contracts allow a one-time cash withdrawal option, but exercising it can cut future payments by 30% for the rest of the policy’s life.10New York Life Annuities. Withdrawal Riders Guide Death benefits also take a hit. A partial surrender typically reduces the death benefit dollar-for-dollar by the amount withdrawn plus any surrender charges, leaving less for your beneficiaries.
Before pulling funds, ask your insurer for an in-force illustration showing what your guaranteed income, account value, and death benefit would look like after the proposed withdrawal. Compare that to your retirement needs. A home is a real asset, but trading guaranteed lifetime income for it is a decision you can’t undo.
Selling Future Structured Settlement Payments
If your annuity is actually a stream of structured settlement payments from a lawsuit or insurance claim, you may be able to sell some or all of the future payments to a factoring company for a lump sum. This route bypasses the withdrawal rules entirely because you’re transferring a payment stream, not tapping an accumulation account.
The trade-off is steep. Factoring companies apply a discount rate that reflects the time value of money and their profit margin, so you’ll receive significantly less than the face value of the payments you’re giving up. Every state has a Structured Settlement Protection Act requiring court approval before the sale can proceed, and a judge has to find that the transaction is in your best interest before any funds change hands.11Special Needs Alliance. Structured Settlements Don’t Always Make Sense If you’re considering this path, get the effective interest rate in writing and compare it against other borrowing options before signing.
What the Mortgage Lender Will Want to See
Pulling money from an annuity is one thing. Proving to a mortgage lender that the funds are legitimately yours is another. Lenders following Fannie Mae guidelines require documentation for any annuity income used to qualify. Acceptable proof includes a benefit statement from the annuity provider, a copy of your federal tax return showing the income, IRS Form 1099-R, or recent bank or financial account statements showing the deposits.12Fannie Mae. Annuity, Pension, or Retirement Income
If you’re liquidating annuity funds for a down payment rather than using ongoing income to qualify, expect the lender to want proof that the funds have been fully distributed and deposited into your bank account before closing. Large deposits without a clear paper trail will trigger extra verification. Keep every statement, 1099-R, and deposit confirmation organized from the start; disorganized documentation is one of the most common reasons closings get delayed.
How to Actually Request the Funds
Contact your insurance company’s distribution department and ask for their withdrawal or distribution form. You’ll need your contract number, the gross or net amount you want, and your federal tax withholding instructions. Some insurers handle everything through an online portal; others still require a physical form with a notarized signature, which typically costs $5 to $15 at a bank or shipping store.
After you submit the paperwork, the insurer reviews the request against your contract terms, checks the surrender schedule, verifies your identity, and calculates any applicable charges. Processing generally takes three to ten business days once the completed form arrives. Electronic fund transfers deposit the money directly into your bank account; paper checks go by mail. If you’re working against a real estate closing date, build in extra time and request electronic delivery to keep things moving.