You cannot move money directly from an annuity into a certificate of deposit without triggering tax consequences unless the annuity sits inside an IRA. There is no product-to-product transfer between an annuity and a CD, so to transfer an annuity to a CD without penalty in the ordinary sense, the annuity has to be a qualified (IRA) annuity and the destination has to be an IRA CD moved by trustee-to-trustee transfer. Any other route means surrendering the annuity first, and the IRS treats that surrender as a taxable distribution.
Why There Is No Tax-Free Swap Between an Annuity and a CD
Section 1035 of the Internal Revenue Code lets you exchange one annuity contract for another annuity contract, or for a qualified long-term care insurance contract, without a taxable event.1Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies The exchange has to stay inside the insurance world. A CD is a banking product, not an insurance contract, so it falls outside 1035. Moving annuity money into a CD is really two transactions: a taxable surrender of the annuity, then a fresh CD purchase with the after-tax proceeds.
The IRA Path: Trustee-to-Trustee Transfer to an IRA CD
If your annuity is held inside a traditional IRA or another qualified retirement account, you have a clean option. Ask the insurance carrier to send the funds directly to an IRA-held CD (often called an “IRA CD”) at a bank or credit union through a trustee-to-trustee transfer. Because the money never leaves the IRA wrapper, no taxes are withheld and no taxable event occurs.2Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions Direct trustee-to-trustee transfers are also not subject to the one-rollover-per-year rule that applies to IRA-to-IRA rollovers.
Not every bank offers IRA-held CDs. Confirm the receiving institution can act as an IRA custodian before you start the paperwork.
Do Not Take the Check Yourself
If the carrier makes the distribution check payable to you instead of the new custodian, it must withhold 20 percent for federal taxes.3Internal Revenue Service. Pensions and Annuity Withholding You then have 60 days to deposit the full original amount into another IRA, including replacing the 20 percent that was withheld out of your own pocket, or the shortfall becomes a taxable distribution. Miss the 60-day window entirely and the whole amount is taxed, plus the 10 percent early withdrawal penalty if you are under 59½. The direct transfer avoids all of this.
What a Non-Qualified Annuity Actually Costs to Cash Out
A non-qualified annuity is one you bought with after-tax dollars outside of an IRA or employer plan. Surrendering it triggers several separate costs.
Ordinary Income Tax on the Gains
The IRS applies an earnings-first rule to non-qualified annuity withdrawals: every dollar comes out of gains until the gains are exhausted, and only then out of your original contributions.4Internal Revenue Service. Publication 575 – Pension and Annuity Income Your cost basis returns tax-free. The gains are taxed as ordinary income at your regular federal rate, not the lower capital-gains rate.5Office of the Law Revision Counsel. 26 USC 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts For 2026 those rates range from 10 percent to 37 percent depending on your total taxable income.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A large lump-sum surrender is reported entirely in the year you receive it, so it can push you into a higher bracket for that year.
The 10 Percent Early Withdrawal Penalty
If you are under 59½ when you surrender a non-qualified annuity, the IRS adds a 10 percent penalty on top of income tax, applied to the taxable portion of the distribution.5Office of the Law Revision Counsel. 26 USC 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts A few exceptions under 26 U.S.C. § 72(q) remove the penalty:
- Distributions paid to a beneficiary after the owner’s death.
- Permanent disability as defined by federal tax law.
- A series of substantially equal periodic payments calculated over your life expectancy, continued for at least five years or until you reach 59½, whichever comes later.
Net Investment Income Tax
Annuity gains count as net investment income. If your modified adjusted gross income for the year exceeds $200,000 for a single filer, $250,000 for joint filers, or $125,000 for a married taxpayer filing separately, the taxable portion of your surrender is subject to an additional 3.8 percent Net Investment Income Tax.7Internal Revenue Service. Questions and Answers on the Net Investment Income Tax These thresholds are not adjusted for inflation, and a large surrender is precisely the kind of one-time spike that can push you across them.
You Also Give Up Tax Deferral
Once your money sits in a CD, the interest is reported to the IRS every year and taxed whether you withdraw it or leave it in the account. The annual tax drag on future growth is an ongoing cost of switching, on top of the one-time cost of the surrender itself.
Surrender Charges From the Insurance Company
Taxes are only part of the picture. Most annuity contracts also impose a surrender charge in the early contract years. A typical schedule starts at 7 percent of the account value in year one and drops by one percentage point each year until it reaches zero, and some contracts have surrender periods lasting up to ten years.8Insurance Information Institute. What Are Surrender Fees? Ask your carrier for your current surrender schedule before deciding anything. If you’re near the end of the period, the charge may be small or zero.
Use the Free Withdrawal Allowance
Many contracts let you withdraw up to 10 percent of the account value each year without a surrender charge. If you don’t need the whole balance at once, taking the free-withdrawal amount each year and moving it into CDs in stages can avoid surrender fees entirely. Check whether unused allowance carries forward.
Ask About Waivers
Some contracts waive surrender charges under specific circumstances such as confinement to a nursing home for a set number of consecutive days, a terminal illness diagnosis, or the death of the annuity holder. Waiver terms vary. Review your policy’s rider pages or call the carrier to ask whether any apply to your situation.
If You Want a Fixed Rate Without the Tax Hit, Consider a MYGA
If the reason you want a CD is a predictable fixed rate rather than the CD itself, a multi-year guaranteed annuity (MYGA) delivers a similar experience without the tax cost. A MYGA locks in a fixed rate for a set number of years, and because it is an annuity contract you can move your existing annuity into it through a tax-free 1035 exchange.1Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies Your cost basis carries over, no tax is triggered, and gains keep compounding without annual taxation.
MYGAs often pay higher rates than comparable bank CDs because insurers invest in longer-duration bonds. The trade-off is that the money sits with an insurance company rather than in an FDIC-insured account, though state guaranty associations provide protection up to limits that vary by state. The exchange has to go directly between the two insurance companies, and the contract owner must be the same on both policies. Ask your current carrier or a licensed insurance agent to initiate the 1035 paperwork so the funds never pass through your hands.
Bottom Line
An IRA annuity can move to an IRA CD with no tax and no penalty if the two custodians handle the transfer directly. A non-qualified annuity cannot: cashing it out means ordinary income tax on the gains, a possible 10 percent penalty if you’re under 59½, possible NIIT exposure, a possible surrender charge, and the loss of tax deferral going forward. Before you sign anything, get your surrender schedule and your cost basis from the carrier, check whether a free-withdrawal allowance or a waiver applies, and weigh a 1035 exchange into a MYGA if a fixed rate is what you’re really after.