A MetLife annuity’s taxes, fees, and withdrawal rules break down like this: earnings come out taxed as ordinary income, a 10% federal penalty applies before age 59½, variable contracts can cost roughly 3% a year in layered charges, and pulling money out early usually triggers a surrender charge of 7% to 9% that phases down over seven to nine years. One thing to know before you look up your contract: MetLife spun off much of its individual retail annuity business into Brighthouse Financial in 2017, so many legacy individual policies sold under the MetLife name are now serviced by Brighthouse. MetLife still issues annuities, primarily through employer-sponsored plans, and maintains several individual variable annuity lines.
Fees You’ll Pay Each Year
Variable annuities are the most expensive of MetLife’s three product families (fixed, variable, and fixed indexed). The all-in annual cost on a variable contract with an income rider can reach roughly 3% or more of the contract value, drawn from three separate layers.
The first layer is the mortality and expense risk charge, commonly around 1.25% a year. It pays the insurer for guaranteeing the death benefit and covering administration. The second is the expense ratio inside each investment sub-account, which works like a mutual fund fee. The third is the cost of any optional riders you added, such as a guaranteed lifetime withdrawal benefit. Rider fees typically fall between 0.25% and 1.0% of contract value per year.
Federal securities law requires the insurer to give you a prospectus laying out sub-account choices, fees, and risks before you invest in a variable contract.1eCFR. 17 CFR 230.498A – Summary Prospectuses for Variable Annuity and Variable Life Insurance Contracts
Fixed and fixed indexed annuities don’t itemize charges the same way. Their cost sits in the spread between what MetLife earns on your money and the rate credited to your contract. Fixed indexed annuities also cap your upside through participation rates or rate caps in exchange for the downside floor.2FINRA. The Complicated Risks and Rewards of Indexed Annuities The fee structure is less transparent, but the total drag is usually lower than on a variable contract.
Surrender charges are separate from these ongoing fees and only bite when you take money out above the free amount. Those rules are covered further down.
How Withdrawals Are Taxed
The tax picture depends on whether you funded the contract with pre-tax or after-tax dollars.
Non-Qualified Contracts (After-Tax Money)
If you bought the annuity outside a retirement plan with money you’d already paid tax on, only the earnings portion is taxable when it comes out. But the IRS applies an earnings-first rule to withdrawals taken before you convert the contract into an income stream. Every dollar you pull is treated as investment gain until all gains are exhausted, and only after that does it tap your original contributions. The rule sits in IRC Section 72(e).3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Withdrawn earnings are ordinary income at your marginal rate. Once earnings are gone, further withdrawals are a tax-free return of your basis. The insurer reports every distribution to the IRS on Form 1099-R.4Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
Once you annuitize (convert the balance into periodic payments), each payment becomes part taxable earnings, part tax-free return of principal. The IRS calls the tax-free share the exclusion ratio: your investment in the contract divided by the expected total return, with expected return based on IRS actuarial tables. If you invested $50,000 and the expected return is $200,000, the ratio is 25%: a quarter of each check comes back tax-free, three-quarters is ordinary income. That ratio holds until you’ve recovered your entire basis. Every payment after that is fully taxable. If you die before recovering all of your cost, the unrecovered amount can be claimed as a deduction on your final return.5Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities
Qualified Contracts (Pre-Tax Money)
If your MetLife annuity sits inside a traditional IRA, 401(k), or 403(b), nothing in the contract has ever been taxed. Every dollar that comes out, whether principal or earnings, is ordinary income in the year you receive it. Qualified contracts use a different calculation method (the Simplified Method in IRS Publication 575) rather than the General Rule.6Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
The 10% Early Withdrawal Penalty
Take money from any annuity before age 59½ and the IRS adds a 10% federal penalty on top of the ordinary income tax owed. It applies to the taxable portion of the withdrawal for both qualified and non-qualified contracts.7Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The penalty is separate from any surrender charge, so an early cash-out can hit you twice.
IRC Section 72(q)(2) lists exceptions that eliminate the penalty even when you’re under 59½:
- Distributions to a beneficiary after the owner’s death.
- Distributions after you become permanently disabled as defined by the tax code.
- Substantially equal periodic payments based on your life expectancy. Once started, these must continue for at least five years or until you turn 59½, whichever is longer; stopping early triggers retroactive penalties.
- Payments from an immediate annuity that begins paying out right away.
Surrender Charges and the Free Withdrawal Allowance
Most MetLife contracts let you pull a limited amount each year without a surrender charge. This free withdrawal allowance is commonly 10% of the contract’s accumulated value.8MetLife. Annuities: Answering Your Questions About Annuities Income tax and the early withdrawal penalty (if applicable) still apply, but the insurer takes nothing extra.
Withdrawals above the free amount, or a full surrender, trigger a surrender charge that compensates the insurer for the upfront cost of issuing the contract. MetLife surrender charges typically start between 7% and 9% in the first year and decline to zero over roughly seven to nine years.8MetLife. Annuities: Answering Your Questions About Annuities Some contracts use longer schedules. Check the specific schedule in your contract before making a large withdrawal.
Certain fixed annuities also carry a market value adjustment. If interest rates rose after you bought the contract, the MVA reduces your surrender value; if rates fell, it works in your favor. The adjustment shifts some interest-rate risk to you in exchange for a higher initial credited rate.
Many contracts waive surrender charges under hardship conditions. A common version applies after at least 90 consecutive days in a nursing home or hospital, beginning after the first contract anniversary, or upon diagnosis of a terminal illness. Waivers usually require written proof from a physician and must be claimed within a specified window. Not every contract includes this rider, so read your contract or ask MetLife directly.
One more purchase-side protection worth knowing: after you receive a new contract, you get a free-look period (usually at least 10 days, longer in some states and for older buyers or replacement contracts) to cancel and get your premium back without any surrender charge.9Investor.gov (U.S. Securities and Exchange Commission). Variable Annuities – Free Look Period For a variable contract, the refund can be adjusted for market gains or losses during that window.
Swapping Contracts Without a Tax Hit: 1035 Exchanges
If your current annuity has high fees, weak investment options, or a rider you no longer want, you can exchange it for a different annuity without triggering income tax. This is a 1035 exchange, named for the tax-code section that permits it. The same provision lets you exchange an annuity for a qualified long-term care policy.10Office of the Law Revision Counsel. 26 U.S. Code 1035 – Certain Exchanges of Insurance Policies
Two catches matter. First, the owner must be the same on both contracts; you can’t use a 1035 to move an annuity to another person. Second, if you do a partial 1035 exchange and then withdraw money from either contract within 24 months, the IRS may treat the whole transaction as a taxable distribution.
A 1035 exchange doesn’t reset your cost basis. Your original investment carries into the new contract, so the tax-free recovery of contributions is preserved. However, if the old contract is still inside its surrender period, you’ll owe those charges when you move. That cost can easily outweigh the benefit of switching, so run the numbers first.
Required Minimum Distributions on Qualified Contracts
If your MetLife annuity sits inside a qualified retirement account, required minimum distributions start the year you turn 73.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Under SECURE 2.0, that age rises to 75 beginning in 2033. Non-qualified annuities are not subject to RMD rules.
The penalty for missing an RMD is 25% of the shortfall. If you catch it and take the distribution within two years, the penalty drops to 10%.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
A qualified longevity annuity contract, or QLAC, can shrink your RMDs. You can use up to $210,000 from a qualified account to buy a deferred annuity that doesn’t start paying until as late as age 85.12Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs The QLAC balance is excluded from RMD calculations until payments begin, which reduces what you’re forced to withdraw in the early retirement years.
What Beneficiaries Owe
When the owner dies during the accumulation phase, the death benefit goes to the named beneficiary. At minimum it equals the contract value at death, and variable contracts often guarantee it won’t fall below total premiums paid. Optional riders can lock in higher values at periodic intervals for an additional fee.
Annuities do not get a step-up in cost basis at death. Section 1014 of the tax code, which gives inherited stocks and real estate a fresh basis at fair market value, explicitly excludes annuities.13Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent The beneficiary inherits the owner’s original basis, so all the accumulated growth is taxable as ordinary income when withdrawn. This is one of the biggest tax disadvantages of leaving an annuity to heirs.
For non-qualified contracts, if the owner dies before the annuity start date, the whole contract value generally must be paid out within five years. IRC Section 72(s) enforces this by stripping annuity tax treatment from any contract that doesn’t comply.3Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts A designated beneficiary can stretch payments over their own life expectancy instead, as long as distributions begin within one year of the owner’s death. A surviving spouse gets the best treatment of all: the spouse can step into the owner’s shoes, continue the contract as their own, and keep the deferral going.
If the owner dies after annuitization has started, remaining payments must continue at least as rapidly as they were being made. A lump sum to a beneficiary is taxable to the extent it exceeds the owner’s unrecovered cost.6Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
Qualified annuities inside IRAs or employer plans follow the account’s beneficiary rules rather than Section 72(s). Under the SECURE Act and SECURE 2.0, most non-spouse beneficiaries must empty the account within 10 years of the owner’s death. A surviving spouse can still roll the account into their own IRA.