When Should I Start Withdrawing Annuities?

Annuities are one of the most common forms of saving for retirement. They are good for deferring taxes on contributions up until a certain age, or as a safeguard against a life-altering event. However, if you choose to withdraw your annuity early, the earnings could be taxed as ordinary income. You must pay an additional 10 percent on the withdrawal as a penalty to the IRS, and you may have to pay a fee, referred to as a surrender fee, to the manager of your annuity fund. So the best time to withdraw money is after you reach age 59 1/2.

Annuity Defined

An annuity is an investment contract between you and a financial-services firm, which usually is an insurance company. The goal is to provide retirement income on a tax-deferred basis. As your contributions accumulate, your annuity grows, leaving you with a variety of options when you're ready to start withdrawing.

Surrender Fees

Withdrawals from annuities are generally taxed at 10 percent before age 59 1/2. The 10 percent serves as a penalty for early withdrawal. Once you've reached 59 1/2 you can withdraw your money in one of two ways: through a partial or total lump sum, without having to pay a tax penalty. In addition to a penalty, most annuities charge a surrender fee for making withdrawals before a certain time. The surrender charges vary from annuity to annuity and will decrease over time. For instance, surrender or withdrawal charges may be 10 percent in the first year and 5 percent in the 10th.

Special Cases

There are cases in which a surrender charge can be waived, including death, continuous confinement (30 days or more) in a nursing home facility, terminal illness or unemployment.

About the Author

Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.