How to Cash Out a Retirement Annuity

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Annuities are retirement structures recognized by the IRS to help investors with tax breaks while saving toward retirement. Money in an annuity grows tax-deferred with distributions after age 59 1/2 being added to ordinary income. A retirement annuity may have been created by an employer retirement plan, an IRA annuity or as a supplemental retirement account. The circumstances on how the annuity was created may affect how it is taxed when it is distributed.

Calculate what your distribution needs are. Most people use annuities to create a monthly income stream, reducing the immediate tax bill and allowing the principal to still work on a tax-deferred basis. Once you are age 59 1/2, you are able to take periodic, regular or lump sum distributions from an annuity.

Decide whether or not you want an income based on earnings on the principal or a guaranteed monthly income for the rest of your life. You can choose to take regular distributions for a specific dollar amount, say $500 per month. If you fear you may outlive your money, you may want to annuitize the contract which means you elect to take regular distributions based on your life expectancy. If you choose to annuitize, you will not be able to change your mind later. If you choose a voluntary distribution you can increase, decrease or stop it as you determine necessary.

Talk to a tax advisor about the tax consequences of distribution. For qualified annuities where you received a tax break for contributing, both principal and earnings will be added to ordinary income. If your annuity is substantial, this could lead to a substantial tax bill. If your annuity was a non-qualified annuity with post-tax dollars contributed, only the earnings are taxed. If you are looking to buy a home, it may be wise to use the annuity to fund a down payment and pay the mortgage rather than cash out and lose a large amount to taxes.

Contact the annuity administrator for distribution paperwork. Fill out the forms with your name, contact information and how you wish to receive the money: lump sum, regular payments or annuitized. Funds can be sent via check or automatically deposited into a checking account if you include your bank information.

File taxes using Form 1040. Line 16 accounts for annuity income. The amount listed here should match the 1099R you received for the distribution.


  • Annuitized contracts are often structured to give you a lifetime income based on your life expectancy. There are variations that allow you to choose your younger spouse's life expectancy, lowering monthly income because the insurance company expects to pay for a longer period. You may also choose a "period certain" which pays a specified amount for a designated number of years until the funds are exhausted.

    Should you pass away during the annuitization payout phase, your beneficiaries will receive the balance of your annuity only if you have chosen a period certain option. Lifetime income choices leave no funds to the beneficiaries even if you pass away early in the contract period.


  • Distributions from annuities prior to age 59 1/2 may have a 10 percent tax penalty imposed. Consult a tax advisor if you are distributing funds before the designated age.