Should I Cash Out My Annuity? What to Check First
Cashing out an annuity - a full surrender - ends the contract and sends the remaining value to you, minus any charges and taxes. For some owners it is a sensible step; for others it gives up guarantees they cannot get back. This guide does not answer the question for you. It lays out what to check in your own contract so the decision is made with the full picture.
Before cashing out an annuity, check where you are in the surrender schedule, whether a market value adjustment applies, how the payout will be taxed, whether the 10% early-distribution penalty applies before age 59½, and what rider guarantees or death benefits you would give up. Partial withdrawals or a 1035 exchange may achieve the same goal at lower cost.
Key takeaways
- A full surrender ends the contract permanently - riders, guarantees, and death benefits end with it.
- Surrender charges usually decline each contract year; the same cash-out can cost very different amounts a year apart.
- The gain in a non-qualified annuity is taxed as ordinary income in the year you cash out.
- Qualified (IRA) annuity money is generally fully taxable when withdrawn, unless it moves by direct transfer.
- Partial withdrawals within the free allowance, or a 1035 exchange, are alternatives worth understanding first.
What does it mean to cash out an annuity?
Cashing out means requesting a full surrender: the insurer ends the contract and pays out the cash surrender value - the account value minus any surrender charge and market value adjustment, and less any tax withholding you elect.
The number that matters is the cash surrender value, not the account value. Most statements show both. The gap between them is what cashing out would cost in contract charges today.
A full surrender is different from a partial withdrawal. A partial withdrawal leaves the contract in force; a surrender closes it. Once closed, the contract cannot be reopened on the same terms.
How much will surrender charges cost me?
It depends on your contract year. Most deferred annuities use a declining schedule - for example 7% in year one falling to 0% after year seven or later. Your contract's schedule page, and your statement, show the current percentage.
Because the percentage usually drops on each contract anniversary, timing matters. Owners who are close to the end of the schedule sometimes find that waiting weeks or months changes the cost substantially.
Many contracts also waive surrender charges in specific situations such as a nursing home stay, terminal illness, or death. Those waivers are defined in the contract and usually require documentation.
The Surrender Charge Estimator shows how a typical declining schedule treats a given withdrawal.
What is a market value adjustment?
A market value adjustment (MVA) is an extra increase or decrease applied to amounts taken out during the surrender period of many fixed and fixed index annuities. It generally reduces the payout if interest rates have risen since purchase and can increase it if rates have fallen.
Not every contract has an MVA, and it usually applies only during the surrender period. Check the contract or ask the insurer for a surrender quote, which will show the MVA if one applies.
How is cashing out an annuity taxed?
For a non-qualified annuity, the gain above what you paid in is taxed as ordinary income in the year of surrender. For an annuity held in an IRA or other qualified plan, the entire amount is generally taxable income unless it is moved by direct transfer or rollover.
A large cash-out in a single year can push income into a higher bracket and can affect items tied to income, such as Medicare premium brackets and the taxation of Social Security benefits.
Before age 59½, a 10% federal early-distribution penalty can apply to the taxable portion, with specific exceptions. A tax professional can confirm how it applies to your situation.
What would I give up by cashing out?
Cashing out ends every guarantee in the contract: income-rider benefit bases, guaranteed lifetime income, enhanced death benefits, and any locked-in crediting terms. The rider fees you have already paid are not refunded.
An income rider's benefit base is not cash - it cannot be withdrawn - but it may support a lifetime income amount that would be difficult to recreate at today's age and pricing. Understanding that value is part of understanding the true cost of a cash-out.
- Income rider benefit base and any guaranteed lifetime income
- Enhanced or guaranteed death benefits for beneficiaries
- Current crediting rates, caps, or guaranteed minimum rates
- Rider fees already paid, which are not refunded
What are the alternatives to cashing out completely?
Common alternatives include taking only the free-withdrawal allowance each year, setting up systematic withdrawals, using an income rider as designed, annuitizing, or moving the value to another annuity through a 1035 exchange, which is not a taxable event when done correctly.
Each alternative has trade-offs, and a 1035 exchange can start a new surrender schedule. The guide to getting money out of an annuity walks through each route and what it costs.
What should I check before deciding?
Get a written surrender quote from the insurer, confirm your contract year and schedule, note any MVA, estimate the tax, list the guarantees you would give up, and compare against at least one alternative.
A written surrender quote from the insurer is the most reliable number to work from. The checklist below covers the rest.
- Request a surrender quote showing the exact cash surrender value
- Confirm your current contract year and the next anniversary date
- Check whether an MVA or surrender-charge waiver applies
- Estimate the tax, including any early-distribution penalty
- List the rider and death-benefit guarantees that would end
- Compare with a partial withdrawal or 1035 exchange
Frequently asked questions
Can I cash out my annuity at any time?
Generally yes - you can request a full surrender at any time, but charges, a market value adjustment, and taxes may reduce what you receive. Annuitized contracts usually cannot be cashed out.
How long does it take to get money after cashing out an annuity?
Insurers commonly process surrenders within about one to two weeks after receiving complete paperwork, though timing varies by company and by how the payment is delivered.
Is it better to cash out an annuity or keep it?
That depends on the contract terms, your age, tax year, income needs, and the guarantees involved. AnnuityScore does not recommend buying, selling, surrendering, or keeping any contract; the goal is to understand your position before deciding.
Do I pay taxes if I cash out an inherited annuity?
Generally the gain is taxable to the beneficiary as ordinary income. Beneficiaries often have payout options that spread the tax over time; the rules depend on the contract and whether it was qualified.