The best time to start taking money out of an annuity, for most owners, is on or after age 59½, after your contract’s surrender period has ended, and before the IRS forces your hand with required distributions if the annuity sits inside a pre-tax retirement account. Three separate timing rules decide what a withdrawal actually costs you: a federal tax penalty before 59½, insurance company surrender fees inside the contract’s early years, and a 25% excise tax if you wait too long on a qualified annuity. Lining your withdrawals up with all three is what keeps the most money in your pocket.
Why Age 59½ Is the Floor for Most People
Federal law imposes a 10% additional tax on the taxable portion of any annuity withdrawal you take before age 59½. The rule comes from Section 72(q) of the Internal Revenue Code for non-qualified annuities (those bought with after-tax dollars) and Section 72(t) for annuities held inside Traditional IRAs, 401(k) plans, and similar accounts.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
The penalty bites hard on non-qualified annuities because of how the IRS orders the money coming out. Withdrawals from a non-qualified contract are treated as earnings first and principal second. Each dollar you pull is treated as taxable gain up to the amount by which the contract’s cash value exceeds what you paid in, and only after the gains are exhausted does the rest come out as a tax-free return of your original investment.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts So if a contract has grown from $100,000 to $150,000 and you pull $30,000 before 59½, the full $30,000 is earnings. You owe ordinary income tax on all of it, plus $3,000 in penalty.
The 10% penalty does not apply to distributions taken on or after the date you turn 59½, to distributions made because you became disabled, or to distributions set up as substantially equal periodic payments over your life expectancy.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: 10-Percent Penalty for Premature Distributions For most people, the clean answer is simply to wait.
If You Need Income Before 59½
If waiting is not an option, a series of substantially equal periodic payments (often called a 72(t) plan) lets you take annuity income early without the 10% penalty. The payment amount is fixed by formula, based on your life expectancy alone or on the joint life expectancies of you and a beneficiary.3Internal Revenue Service. Substantially Equal Periodic Payments
The commitment is strict. Once the payments start, you cannot change the amount or take extra withdrawals from that account, and the schedule must run until the later of five full years from the first payment or the date you turn 59½. Start at 54 and you must continue past 59½. Start at 57 and you must continue until 62, even though you crossed 59½ along the way.3Internal Revenue Service. Substantially Equal Periodic Payments
Breaking the schedule early for any reason other than death or disability is punishing. The IRS retroactively applies the 10% penalty to every distribution you have already taken under the plan, plus interest covering the entire deferral.3Internal Revenue Service. Substantially Equal Periodic Payments Only start a 72(t) plan if you are certain you can live with the fixed payment for the full required term.
Check Your Contract’s Surrender Period
Reaching 59½ clears the federal penalty, but your insurance company has its own clock. Most annuity contracts include a surrender charge period, typically six to ten years from each premium payment, during which the carrier charges a fee for withdrawals above a stated threshold. Many contracts let you take out up to 10% of the account value each year without any charge.4Investor.gov. Surrender Charge
Surrender fees usually ride a sliding scale: a schedule might start at 7% in year one and drop a point each year until it hits zero. A $100,000 withdrawal in a year with a 7% charge gives up $7,000 to the insurer before you see the first dollar. Once the surrender period ends, the fee goes away and the full balance becomes accessible.
Watch for how multiple deposits are treated. Some contracts run one surrender schedule from the original purchase date. Others start a fresh multi-year clock on each new deposit, meaning a deposit added three years in can still carry surrender charges well after the original purchase would be free.
Many contracts also waive surrender charges in hardship situations. Common triggers are a terminal illness diagnosis, confinement to a nursing facility for at least 90 consecutive days, total disability before age 65, or certification as chronically ill (unable to perform at least two activities of daily living without help). These waivers usually do not take effect until after the first policy year.5SEC.gov. Waiver of Surrender Charges Rider The exact conditions vary by carrier, so read the rider in your contract.
If you own a fixed annuity, check whether it carries a market value adjustment. The adjustment can either reduce or increase an early-withdrawal payout depending on how interest rates have moved since you bought the contract, and it applies only during the surrender period. That feature can either stack onto surrender charges or partially offset them.
The Upper Deadline on Qualified Annuities
If your annuity is inside a Traditional IRA, 401(k), or similar pre-tax retirement account, waiting too long is as costly as starting too early. Federal law requires you to begin taking required minimum distributions once you reach a specific age. For people who turned 72 after 2022 and will turn 73 before 2033 (generally those born between 1951 and 1959), the required age is 73. For those born in 1960 or later, the age moves to 75 beginning in 2033.6Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
The first distribution is due by April 1 of the year after you reach the applicable age. Every subsequent distribution is due by December 31.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The amount owed each year is calculated from the prior year’s account balance and IRS life expectancy tables.
The Double-Distribution Trap
Using the April 1 deadline for the first distribution sounds attractive, but it can backfire. If you push that first distribution into the following calendar year, your second distribution is still due by December 31 of that same year. Both land in a single tax year. If you turn 73 in 2026 and delay the first withdrawal until April 1, 2027, the 2027 distribution is also due by December 31, 2027.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Doubling up can push you into a higher tax bracket and raise your Medicare premiums. Taking the first distribution in the year you reach the applicable age usually avoids the problem.
What a Missed Distribution Costs
Taking less than the required amount triggers a 25% excise tax on the shortfall.8eCFR. 26 CFR 54.4974-1 – Excise Tax on Accumulations in Qualified Retirement Plans If you fix the mistake within two years, the penalty drops to 10%. To ask the IRS to waive it, file Form 5329 with a written explanation showing the shortfall was a reasonable error and that you are correcting it.9Internal Revenue Service. Instructions for Form 5329 The IRS reviews waiver requests individually.
How Timing Affects Taxes, Medicare, and Social Security
Every taxable dollar you withdraw from an annuity is taxed as ordinary income, not at the lower capital gains rate. For a non-qualified annuity, the earnings-first ordering applies to partial withdrawals, so your early withdrawals are the taxable ones. For an annuity held inside a Traditional IRA or 401(k), every dollar is fully taxable because the money went in pre-tax.10Internal Revenue Service. Publication 575, Pension and Annuity Income
That matters for more than your income tax bill. Large withdrawals also raise Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount. The standard Part B premium for 2026 is $202.90 per month. Single filers with modified adjusted gross income above $109,000 (or joint filers above $218,000) pay an additional monthly surcharge ranging from $81.20 to $487.00 depending on bracket, taking Part B to as much as $689.90 per month at the highest tier. Part D carries its own IRMAA surcharge on the same brackets, up to $91.00 per month.11Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
IRMAA uses your tax return from two years prior, so a large withdrawal in 2026 affects premiums in 2028. Spreading withdrawals across several years, rather than taking one big lump sum, can keep you under the next surcharge threshold.
Annuity income also feeds the “combined income” formula used to determine how much of your Social Security is taxable. Combined income is adjusted gross income plus tax-exempt interest plus half of your Social Security benefits. For single filers, combined income above $25,000 can make up to 85% of benefits taxable; the joint-filer threshold is $32,000.12Social Security Administration. Must I Pay Taxes on Social Security Benefits? These thresholds have not been adjusted for inflation since 1993, so most retirees with meaningful annuity income will cross them.
When to Switch From Accumulation to Income
Separately from penalty and tax timing, your contract offers a choice about how income starts. You can annuitize, or you can activate an income rider if your contract includes one.
Annuitization
Annuitizing converts your account balance into guaranteed payments for life or for a set number of years. In exchange, you generally give up access to the lump sum: the insurer takes the balance. Your contract sets a maximum maturity age (often between 85 and 95) by which the insurer can require you to annuitize if you have not already done so.
The payment structure you choose at annuitization is permanent. A single-life option pays the most each month but ends at your death. A joint-and-survivor option continues paying a beneficiary after you die, with a lower monthly amount while you are alive. As a rough illustration, a joint-and-50% survivor option might reduce your monthly payment by about 10% compared with a single-life payout, and a joint-and-100% survivor option might reduce it by roughly 18%, with the exact figures depending on both ages at the time of annuitization.13Pension Benefit Guaranty Corporation. Benefit Options
Income Riders
Many newer contracts include an optional income rider that pays guaranteed lifetime income without surrendering your account balance. Riders typically have activation rules of their own, usually a minimum waiting period (often 10 years) or a minimum age. The payment is calculated from a “benefit base” that grows at a set rate during accumulation regardless of actual market performance.
Delaying activation generally increases the payout percentage, because insurers set higher withdrawal rates at older ages. Each year of waiting can meaningfully raise your guaranteed annual income. Once activated, the terms lock in. The decision comes down to how much current income you need versus how much additional guaranteed income you gain by waiting.
If You Inherited the Annuity
A different set of timing rules applies to annuities you inherit, and the answer depends on your relationship to the deceased owner.
A surviving spouse has the most options. You can treat the inherited annuity as your own, so required distributions follow your own age and life expectancy, or you can take life expectancy payments from the inherited account.14Internal Revenue Service. Retirement Topics – Beneficiary
For most non-spouse beneficiaries who inherited after 2019, the account must be emptied by the end of the tenth year following the owner’s death. This 10-year rule replaced the older “stretch” option. If the original owner had already reached the required distribution age at death, you also must take annual distributions during the 10-year window.14Internal Revenue Service. Retirement Topics – Beneficiary
A narrow group of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy: the deceased owner’s minor children (until age 21, when the 10-year clock then starts), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased owner.14Internal Revenue Service. Retirement Topics – Beneficiary In every case, taxable distributions from an inherited annuity are reported as ordinary income in the year received.