How to Close Out a Tax-Sheltered Annuity

by Kimberlee Leonard ; Updated July 27, 2017

Items you will need

  • Calculator
  • Annuity contract

A tax-deferred annuity is an investment structure offered by an insurance company. The annuity contract gives the owner tax-deferred growth on the assets, a promise of lifetime income if so elected and a payment of asset accumulation upon the death of the beneficiary. The owner may decide to close out the annuity, which means the contract is surrendered and the cash value, minus any fees, is returned to the owner. This is a simple process, but you should consider how taxes and fees are computed to determine whether it is worthwhile.

Step 1

Review your annuity contract to see if you qualify for any exclusions. Death benefit proceeds are not assessed penalties but are taxed. Some annuities offer living benefits in the event of disability or long-term care needs.

Step 2

Determine whether you are out of your surrender period. You should be able to find the "Surrender Period" as a part of the contract Table of Contents. Many annuities range from terms of three to seven years, with surrender charges starting as high as 15 percent in the first year and reducing with each anniversary date. For example, assume you bought a seven-year annuity with a surrender charge schedule of 7 percent, then 6 percent, and so on. If you liquidated $100,000 in the second year, you would pay $6,000 in fees.

Step 3

Calculate your tax liability. To determine this, take the existing annuity value and subtract your original investment. So if you liquidate $100,000 in an annuity that originally was opened with $30,000, then $70,000 will be added to your adjusted gross income.

Step 4

Obtain a surrender form from the insurance company holding the annuity if you determine that it is worthwhile to liquidate. Fill the form out, return the contract with the surrender form and wait for your check.

The form will give you the option to withhold taxes. It will also ask you if you qualified for any exceptions that prevent surrender charge assessment. Be sure to fill these sections out if they apply.

Tips

  • Some fixed annuities have a principal protection guarantee. So if you pull the money out during the surrender period, you will still be assessed a penalty, but not to the effect that it eats into the principal value.

Warnings

  • Liquidating an annuity prior to age 59 1/2 creates a 10 percent tax penalty on top of the taxes owed.

About the Author

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.

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