You cannot transfer an annuity to a CD directly. An annuity is an insurance contract and a CD is a bank deposit, so moving between them means surrendering the annuity, taking the cash, and then opening the CD as a separate transaction. The IRS treats the surrender as a taxable event, and your contract may add surrender charges on top. The one clean path around the tax bill: if your annuity is held inside an IRA, you can move the money to an IRA CD through a trustee-to-trustee transfer and owe nothing.
Why No Direct Transfer Exists
Section 1035 of the tax code lets you swap between certain insurance products without triggering tax: annuity to annuity, life insurance to annuity, or either product to a qualified long-term care contract.1Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies A bank CD is not an insurance contract and does not qualify. That means the only way to get annuity money into a CD is to surrender the annuity, receive the proceeds, and deposit them yourself. Every cost below flows from that fact.
Surrender Charges and Market Value Adjustments
Most annuity contracts charge you to withdraw money during the first several years. A typical schedule starts around 6% or 7% of the amount withdrawn and drops by roughly one percentage point each year until it reaches zero. On a $100,000 annuity cashed out in year two, a 5% charge takes $5,000 off the top before taxes enter the picture. The exact numbers live in your contract, so pull your most recent statement to see where you stand in the schedule.
Almost every contract includes a free withdrawal provision, commonly 10% of the contract value per year, that you can pull without triggering the surrender charge. Taxes still apply to that withdrawal, but the contractual penalty does not.
Some fixed annuities also apply a market value adjustment on early surrender. An MVA recalculates your payout based on how current interest rates compare to the rate guaranteed when you bought the contract. If rates have risen since purchase, the adjustment reduces your surrender value. If rates have fallen, it can increase it. When a contract carries both an MVA and a surrender charge, they hit together.
Federal and State Taxes on the Cash-Out
The IRS taxes annuity withdrawals as ordinary income, not at capital gains rates.2Internal Revenue Service. Publication 575, Pension and Annuity Income How much of the withdrawal is taxable depends on how the annuity was funded.
A non-qualified annuity was funded with after-tax dollars. Your original contributions come back tax-free, but only after you have pulled out every dollar of gain. Under Section 72(e), earnings come out first, so a full surrender means paying ordinary income tax on the total growth above your cost basis.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
A qualified annuity, held inside an IRA, 401(k), or similar plan, was funded with pre-tax money. The entire distribution is taxable as ordinary income if you cash it out.2Internal Revenue Service. Publication 575, Pension and Annuity Income For a qualified annuity, though, cashing out is usually the wrong move; see the IRA section below.
A large lump-sum surrender can push part of the distribution into a higher federal tax bracket for the year. Only the income above each bracket threshold gets the higher rate, but the effect on a big withdrawal is still real. Most states also tax annuity distributions as ordinary income, at rates from zero in no-income-tax states to above 13% in the highest. Factor your state rate into the total before deciding whether to move the money.
The 10% Early Withdrawal Penalty
If you are younger than 59½, the IRS adds a 10% penalty on top of ordinary income tax, applied to the taxable portion of the distribution.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Exceptions exist for disability, death of the contract holder, and a series of substantially equal periodic payments over your life expectancy, among a few others. A one-time surrender to fund a CD does not qualify. On $50,000 of taxable gain, that penalty alone is $5,000, on top of the income tax you already owe.
Withholding and Reporting
When you surrender in a lump sum, the payer withholds federal income tax at a default rate of 10% unless you file Form W-4R to elect a different rate between 0% and 100%.4Internal Revenue Service. 2026 Form W-4R – Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions If your actual tax liability will exceed 10%, elect a higher rate to avoid a surprise at filing. The insurer will send Form 1099-R the following January showing the gross distribution and the taxable amount.5Internal Revenue Service. Instructions for Forms 1099-R and 5498 If the 10% penalty applies, you calculate it on Form 5329 with your return.
If Your Annuity Is Inside an IRA
This is the exception that matters. If your annuity is held inside a traditional IRA or another qualified retirement account, you do not have to cash out and pay tax to reach a CD. Open an IRA CD at your bank and instruct the insurance company to send the funds directly to the bank as a trustee-to-trustee transfer. The money stays inside the IRA wrapper the whole time, and no tax is withheld or owed.6Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
A trustee-to-trustee transfer is not a rollover, so the one-rollover-per-year rule and the 60-day deadline do not apply.6Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Surrender charges from the annuity contract still apply if you are inside the surrender period, but the entire tax bill disappears.
If the insurance company insists on sending you a check instead, you have 60 days to deposit the full amount into an IRA CD to preserve the tax deferral. Distributions from an employer plan such as a 401(k) annuity carry mandatory 20% withholding, which means you would need to make up that 20% from other funds to roll over the full amount within the deadline.2Internal Revenue Service. Publication 575, Pension and Annuity Income Anything not rolled over in time becomes taxable income for the year.
A CD-Like Alternative Without the Tax Hit
If your annuity is non-qualified and you want the predictability of a CD without triggering the tax on gains, a 1035 exchange into a multi-year guaranteed annuity is worth considering. A MYGA locks in a fixed rate for a set term much like a CD does. It remains an insurance contract, so a 1035 exchange applies and no tax is triggered.1Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies Your cost basis carries over and the gains keep growing tax-deferred. You give up FDIC insurance and rely on state guaranty coverage instead, but you keep the tax deferral, which can outweigh the insurance difference depending on your balance and bracket.
Ways to Reduce What the Move Costs You
A full surrender in one year maximizes both the surrender charge and the tax bill. A few approaches soften the blow.
Use the free withdrawal provision over several years. If your contract allows 10% penalty-free withdrawals annually, pulling that amount each year and depositing it into a series of CDs spreads both the surrender charges and the taxable income across tax years. On a $200,000 annuity, that is $20,000 per year moved without surrender fees. Smaller annual withdrawals are also less likely to push you into a higher bracket.
Wait out the surrender period. If you are two or three years from the end of the schedule, patience often pays for itself. A 3% surrender charge on $200,000 is $6,000 you never get back. Compare that to the rate advantage the CD offers before pulling the trigger.
Time the surrender to a low-income year. Between jobs, recently retired, or otherwise earning less than usual, the same distribution lands in a lower bracket. This does not help with surrender charges, but it directly reduces the tax bill.
Some contracts also allow partial annuitization, letting you convert part of the balance to periodic payments while surrendering the rest.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Not every contract offers this, but it is worth asking.
How Your Deposit Protection Changes
The safety net behind your money changes when you move from an annuity to a CD. Bank CDs are insured by the FDIC up to $250,000 per depositor, per bank, for each ownership category, backed by the full faith and credit of the federal government.7FDIC.gov. Deposit Insurance At A Glance
Annuities are not FDIC-insured. They are backed by state insurance guaranty associations, which step in if the issuing insurer fails. Most states cap annuity coverage at $250,000 in present value of benefits, matching the FDIC limit, but the range runs from $100,000 to $500,000 depending on the state, and a few states impose an overall $300,000 cap across all policies with a single failed insurer. If your balance is large enough that the protection limit matters, splitting the proceeds across CDs at more than one bank keeps each deposit fully within FDIC coverage.