An annuity is a tax-deferred investment vehicle that helps consumers save for retirement. Different annuities fulfill different investment objectives, with fixed annuities designed for conservative investors and variable annuities offering more diversity for more aggressive investors. Taking money out of an annuity, before you are allowed to, results in either contract or tax penalties.
Deferred annuities must be held for a specified period of time called a surrender period. During the surrender period, you may have access to 5 or 10 percent of your account value; but if you take out more than the contract allotment, you will be assessed a surrender charge. The surrender charge is a percentage of the money distributed from the annuity. Surrender charges are higher in the early years of the contract and reduce with each contract anniversary date. When the surrender period is satisfied, anywhere from one to 15 years, there are no more penalties assessed on distributions.
Annuities are designed for retirement savings. Annuity owners who take money out prior to the Internal Revenue Service threshold age of 59-1/2 are penalized 10 percent. The penalty may be assessed in one of two ways: on earnings only or on the entire distribution, including principal. If the annuity is a qualified IRA plan, then all distributions are penalized. Supplemental retirement annuities are funded with after-tax money so only earnings are taxed and penalized.
Your annuity may have exceptions for penalties. Read the terms and conditions of the contract to fully understand what situations waive any distribution penalties. Death or disability is often allowed without any surrender charges assessed. You may annuitize the contract, meaning take a regular stream of income, for at least five years. Surrender charges may be waived for this as well. Some contracts have long-term care provisions.
If the annuity is a qualified retirement plan, such as an IRA, you may have exceptions to avoid the 10 percent tax penalty. You can take up to $10,000 to buy, build or remodel a home for yourself, a child or grandchild. You can also use qualified annuity funds to pay for college expenses, including tuition and books for yourself, a spouse, child or grandchild. IRS penalties and exceptions are independent of the annuity contract terms. Always check with your annuity provider, before taking any distributions, to fully understand possible penalties.
With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.