Can You Take Money Out of an Annuity? Rules, Taxes & Penalties

Yes, you can take money out of an annuity, but early access usually comes with three separate costs: a surrender charge from the insurance company, ordinary income tax on the earnings portion of the withdrawal, and a 10% federal tax penalty if you’re younger than 59½. What you actually pay depends on when you take the money, what kind of annuity you own, and whether you funded it with pre-tax or after-tax dollars.

Your Withdrawal Options During Accumulation

Before you convert the contract into a stream of income payments, you generally have three ways to pull money out:

Partial withdrawal. You take a specific dollar amount, and the rest stays invested.
Systematic withdrawals. You set up recurring payments — monthly, quarterly, or annually — from the account balance.
Full surrender. You terminate the contract, and the insurer pays out your remaining account value minus any applicable charges.

One boundary matters here. These options exist during the accumulation phase. Once you annuitize — convert the balance into a guaranteed series of periodic payments for life or a set number of years — you generally cannot change the schedule or take additional lump sums. Annuitization is a one-way door.

Surrender Charges

Withdraw money during the early years of a deferred annuity and the insurance company will typically deduct a surrender charge, calculated as a percentage of the amount taken out. The charge follows a declining schedule that shrinks each year and eventually reaches zero. A common example: 8% in year one, dropping by one percentage point each year until it disappears. Surrender periods generally run three to ten years, with six to eight years the most common range.

Some fixed and indexed annuity contracts add a market value adjustment on top of the surrender charge. If current interest rates are higher than when you bought the contract, the adjustment reduces your payout. If rates have fallen since purchase, the adjustment increases what you receive.

How the IRS Taxes Your Withdrawal

How much of your withdrawal is taxable depends on whether the annuity is “qualified” or “non-qualified.” Either way, the taxable portion is taxed as ordinary income, never at the lower capital gains rates.¹ A large withdrawal can push your total income into a higher bracket for the year.

Non-Qualified Annuities

A non-qualified annuity was purchased with after-tax dollars. When you take a withdrawal before the annuity starting date, the IRS treats earnings as coming out first. You owe ordinary income tax on every dollar withdrawn until all the gains in the contract have been distributed; only after that do the remaining withdrawals come back as a tax-free return of your original investment.² Practically, this earnings-first rule means early withdrawals from a non-qualified annuity are almost entirely taxable.

Qualified Annuities

A qualified annuity sits inside a tax-advantaged account like a traditional IRA, 401(k), or 403(b) and was funded with pre-tax dollars. Because the money went in untaxed, the entire distribution is generally taxable as ordinary income when it comes out.³ The exception is any after-tax contributions you made to the plan; the portion representing those contributions comes back tax-free.¹

The 10% Early Withdrawal Penalty

Take money out before age 59½ and the IRS adds a 10% penalty on top of the income tax you already owe. For non-qualified annuities, this penalty is imposed under Section 72(q) of the Internal Revenue Code and applies to the taxable portion of the withdrawal.² For qualified annuities inside IRAs or employer plans, a parallel penalty under Section 72(t) applies.

Several exceptions let you avoid the 10% penalty even before 59½:

Death of the owner. Distributions to a beneficiary after the account holder dies are exempt.
Total and permanent disability. You must be unable to engage in substantial gainful activity due to a physical or mental condition expected to be long-lasting or fatal.
Substantially equal periodic payments. A series of payments calculated over your life expectancy, covered below.
Immediate annuity contracts. Payments begin within one year of purchase, so these are exempt by design.
Unreimbursed medical expenses. Distributions used for medical expenses exceeding 7.5% of your adjusted gross income.
Qualified disaster distributions. Up to $22,000 for individuals who suffered economic loss from a federally declared disaster.

Some exceptions apply only to qualified plans, only to IRAs, or to both. The IRS maintains a comparison chart showing which situations qualify under which rules.⁴

Substantially Equal Periodic Payments

One of the most practical ways to reach annuity funds before 59½ without the 10% penalty is a series of substantially equal periodic payments, sometimes called a SEPP or “72(t) distribution.” The IRS lets you calculate a fixed annual payment based on your life expectancy, or the joint life expectancies of you and a beneficiary, and withdraw that amount at least once per year.⁵

Three IRS-approved calculation methods are available: the required minimum distribution method, the fixed amortization method, and the fixed annuitization method. Each produces a different annual figure, giving you some room to choose a payment size that fits your situation.⁵

The catch is that once you start, you cannot change the payment amount or stop early. The schedule must continue until the later of five years from the first payment or the date you turn 59½. If you modify the payments before that date for any reason other than death or disability, the IRS retroactively applies the 10% penalty to all prior distributions plus interest.²

Contract Waivers That Bypass Surrender Charges

Separate from IRS rules, most annuity contracts include provisions that let you withdraw limited amounts without triggering the insurer’s surrender charges. The most common is a free withdrawal allowance, typically up to 10% of the contract value per year, available regardless of where you are in the surrender period.

Many contracts also waive surrender charges entirely when specific life events occur:

Terminal illness. A diagnosis expected to result in death within a specified period, often 12 or 24 months, may allow full access without a surrender charge.
Nursing home confinement. Confinement to a qualified long-term care facility for a minimum number of consecutive days, commonly 90, may trigger a waiver on some or all of the withdrawal.⁶
Disability. Some contracts include a total disability waiver that activates after a waiting period. Regulatory standards cap that period at no more than 90 days.⁷

These waivers eliminate the insurer’s surrender charge only. You would still owe ordinary income tax on the taxable portion of the withdrawal, and the 10% early withdrawal penalty may still apply if you’re under 59½ and no IRS exception covers your situation.

Filing the Withdrawal Request

When you’re ready to take money out, the insurer’s request form typically asks for:

Contract or policy number. The unique identifier on your most recent statement.
Withdrawal amount. A fixed dollar amount or a percentage of the account value.
Tax withholding election. For a non-periodic distribution, the insurer withholds 10% for federal income tax by default unless you elect a different amount or opt out entirely using IRS Form W-4R.¹

Most insurers accept requests through an online client portal, by fax, or by mail. Processing times vary but usually run about one to two weeks, and approved funds are typically delivered by electronic transfer to the bank account on file.

1
Internal Revenue Service. Publication 575, Pension and Annuity Income
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Topic No. 410, Pensions and Annuities
4
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
5
Internal Revenue Service. Substantially Equal Periodic Payments
6
John Hancock. Withdrawal Charge Waiver Request
7
Insurance Compact. Additional Standards for Waiver of Surrender Charge Benefit