When your annuity reaches its maturity date, you generally have five choices: take a lump sum, convert the balance into lifetime income, elect payments for a fixed number of years, set up a joint payout that covers a spouse, or move the money into a new contract through a 1035 exchange. Deciding what to do when your annuity matures is a real deadline, not a suggestion. Most deferred contracts set maturity somewhere between age 85 and 95, and the insurance company usually sends a notice about 30 days out. The choice you make affects your tax bill, your income stream, and in some cases your spouse’s financial security for years afterward.
Why the Deadline Matters
The maturity date (sometimes called the annuitization date) is the contractual point when your annuity stops growing on a tax-deferred basis and the insurer expects instructions on how to pay the money out. If you do nothing, the contract’s default settlement provision takes over. The industry standard default is a life annuity with a guaranteed payment period of at least five years, which may not fit your situation at all. Ignoring the notice can lock you into a structure you would not have chosen.
If you are not ready to start income, many insurers will extend the maturity date, sometimes to age 100, keeping the contract in accumulation. You typically need to request the extension in writing before the current maturity date, and the insurer will confirm the new date in writing.
Your Five Settlement Options
Lump-Sum Distribution
Taking the full contract value in one payment ends your relationship with the insurance company. By the time an annuity matures, any surrender charge period has almost always expired, since those charges typically phase out within the first six to eight years of the contract. You should receive the full accumulated value without a surrender penalty. The tax cost is the concern: a lump sum can push a large amount of taxable gain into a single year and bump you into a higher bracket.
Life-Only Annuitization
This option pays you for as long as you live. The insurer calculates the monthly amount from actuarial tables based on your age at election. Payments stop at your death, so nothing passes to heirs. In exchange for that risk, you get the highest per-payment amount of any lifetime option.
Period-Certain Annuitization
Payments run for a fixed term, commonly 10 or 20 years. If you die before the period ends, your named beneficiary receives the remaining payments. If you outlive the period, payments stop. This fits a defined planning horizon rather than open-ended longevity.
Joint and Survivor Annuity
The insurer prices payments off two life expectancies, usually you and a spouse, so each payment is smaller than a life-only payout for one person. Income continues until the second person dies. Some contracts reduce the survivor benefit to 50% or 75% of the original payment after the first death; others continue at the full amount.
1035 Exchange Into a New Contract
If none of the payout options suit you and you want to move the balance to a different annuity, a 1035 exchange transfers the funds directly to another insurer without triggering income tax on the gains.1Office of the Law Revision Counsel. 26 U.S.C. 1035 – Certain Exchanges of Insurance Policies “Directly” is the operative word. If the money passes through your hands first, you have created a taxable event. The exchange must be initiated before your current contract begins distributing funds, so start the process well before the maturity date, not after.
How the Payout Will Be Taxed
Tax treatment depends on whether your annuity is qualified or non-qualified. Getting this wrong can mean a surprise bill at filing time.
Qualified Annuities
A qualified annuity sits inside a tax-advantaged retirement account such as a traditional IRA or a 401(k). Contributions went in pre-tax, so the entire distribution — principal and growth alike — comes out as ordinary income.2Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts There is no tax-free return of principal because the principal was never taxed going in.
Non-Qualified Annuities
A non-qualified annuity was purchased with after-tax dollars outside a retirement plan. Only the earnings are taxable. The IRS applies an exclusion ratio to each payment: total investment in the contract divided by expected return over the payout period. If you invested $100,000 and expect to receive $200,000 in total, the ratio is 50%, so half of each payment is a tax-free return of principal and half is taxable gain.3Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities Once you have recovered your full investment, every dollar after that is fully taxable.
The Age 59½ Boundary
Distributions taken before age 59½ carry a 10% penalty tax on the taxable portion, on top of regular income tax. This applies to both qualified and non-qualified annuities.2Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Most maturity dates fall well past that age, so this typically matters only if you are surrendering early or taking partial withdrawals before the contract matures. Several exceptions eliminate the penalty, including death, total and permanent disability, and a series of substantially equal periodic payments over life expectancy.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Required Minimum Distributions
If your annuity is held inside a qualified retirement account, RMDs must begin by April 1 of the year after you turn 73 (for 2026).5Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Once your annuity is paying out, distributions generally satisfy the RMD, but if you have been deferring and maturity has not yet forced income, confirm that the annual payments meet the required amount. Missing an RMD triggers a 25% penalty on the amount that should have been withdrawn. Non-qualified annuities purchased outside retirement accounts are not subject to RMD rules.
Spousal Consent for Employer-Plan Annuities
If your annuity is part of an ERISA-covered employer plan such as a pension, 401(k), or 403(b), federal law sets the default payout as a qualified joint and survivor annuity covering your spouse. Electing anything else — a lump sum, life-only, or period-certain payout — requires your spouse’s written consent, acknowledging the effect of the election and witnessed by a plan representative or notary public.6Office of the Law Revision Counsel. 26 U.S.C. 417 – Definitions and Special Rules for Purposes of Minimum Survivor Annuity Requirements There is a small-balance exception: if the present value of the benefit is $5,000 or less, the plan can pay a lump sum without your election or your spouse’s consent.7Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent This rule does not reach individually purchased non-qualified annuities, where beneficiary designations follow whatever the contract says.
Setting Tax Withholding
How the insurer withholds federal tax depends on the payment type.
For periodic payments (monthly, quarterly, or annual installments over more than one year), withholding works like wages. Submit Form W-4P to set your filing status and any adjustments. If you skip the form, the insurer withholds as if you are single with no adjustments, which often overshoots.8Internal Revenue Service. Form W-4P – Withholding Certificate for Periodic Pension or Annuity Payments
For a lump sum or any other nonperiodic distribution, the default withholding rate is 10% of the taxable portion. You can opt out or request a higher rate using Form W-4R.9Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income Withholding is only an estimate. If it does not cover your actual tax liability, you will owe the difference at filing, and you may need to make quarterly estimated payments to avoid an underpayment penalty.
What to Gather Before You File Your Election
The insurance company will ask you to complete an Election Form or Settlement Option Form specifying your chosen payout method. You can usually get it through the policyholder portal or by calling the administrative office. Have the following ready:
- Contract number and current value, so the insurer can locate your policy and run the correct settlement calculation.
- Beneficiary information for period-certain or joint-and-survivor options: full legal names, dates of birth, and Social Security numbers.
- Banking details for direct deposit. A voided check or a direct deposit authorization letter from your bank usually works as verification.
- Your tax withholding form: W-4P for periodic payments or W-4R for a lump sum.
- A signed and witnessed or notarized spousal consent form if you are in an ERISA-covered employer plan and electing anything other than a joint-and-survivor annuity.
Submitting the Election
Most insurers accept election forms by mail or through a secure digital upload portal. If you mail originals, use a trackable delivery service; proof of receipt matters when deadlines are in play. Digital submissions typically generate a timestamped confirmation worth saving.
Processing usually takes one to two weeks after the insurer receives complete paperwork. Missing information or mismatched forms can add several weeks, so review everything carefully before you send it. Once the election is processed, you will receive a confirmation by mail or through your online account, and for both periodic payments and lump sums the first deposit typically arrives within 30 days of approval.