How to Cash Out an Annuity Before and After Payments Begin

Cashing out an annuity depends on which stage you're in and what type of annuity you own

If you haven't started receiving payments yet, you can usually surrender the annuity to the insurance company for its cash surrender value — the amount you've paid in minus any surrender charges and fees. If you're already receiving payments, your options narrow: most when ready and deferred annuities cannot be cashed out in full once the payout phase begins, though some allow partial withdrawals or commutation (converting remaining payments into a lump sum). The rules depend on your specific contract, the annuity type, your age, and whether you're inside or outside a retirement account.

Cashing out before age 59½ typically triggers a 10 percent early withdrawal penalty on top of income taxes, unless you're using an exception like substantially equal periodic payments (SEPP). The insurance company may also charge a surrender fee if you're still in the surrender period, which can run 5 to 10 years from purchase. Understanding your contract's terms and the tax consequences before you act will help you avoid unexpected costs.

Key Takeaways

• Before payments start, you can surrender an annuity for its cash surrender value, but surrender charges may explore if you're still in the surrender period.
• After payments begin, most annuities cannot be fully cashed out; you may only be able to take withdrawals beyond your regular payment or request commutation if your contract allows it.
• Withdrawals before age 59½ are subject to a 10 percent IRS penalty on top of income tax, with limited exceptions such as SEPP or disability.
• Annuities held inside IRAs follow IRA withdrawal rules; annuities held outside IRAs follow annuity contract rules, and the two sets of rules can conflict.
• Your contract's surrender schedule, withdrawal provisions, and commutation options are the documents that determine what you can actually do.

Surrendering an annuity during the surrender period

When you first buy an annuity, you enter a surrender period — typically 5 to 10 years, though some contracts run longer or shorter. During this time, if you ask the insurance company to cash out the annuity, they will deduct a surrender charge from your cash surrender value. This charge is a percentage of your account balance and decreases each year; a 7 percent charge in year one might drop to 6 percent in year two, and so on.

The cash surrender value itself is not the same as what you paid in. It equals your contributions plus any gains, minus fees, expenses, and the surrender charge. If your annuity has lost value or you're early in the surrender period, the cash surrender value can be less than you invested. You can find the surrender schedule and current charge in your annuity contract or by calling the insurance company and asking for a surrender quote.

Once the surrender period ends, you can usually withdraw or surrender without the charge, though you may still owe income tax on any gains. Some contracts allow you to withdraw a small percentage each year (often 10 percent) without a surrender charge, even during the surrender period; check your contract's free withdrawal provision.

Cashing out after annuity payments have started

Once you've begun receiving regular payments from an when ready annuity or a deferred annuity in its payout phase, you generally cannot cash out the remaining balance in a lump sum. The insurance company has already priced the payments based on your life expectancy and the terms you chose, and reversing that contract is not standard.

Some contracts do allow commutation — the option to convert your remaining stream of payments into a single lump sum. Whether this is available depends on your specific contract. If it is, the insurance company will calculate the present value of your remaining payments (using an interest rate set in your contract) and offer you that amount. This is not a negotiation; the calculation is defined in your contract language.

If commutation is not available or you want to access only part of your money, some annuities allow you to take withdrawals beyond your scheduled payment. These are often called excess withdrawals or additional withdrawals. The amount you can withdraw and any charges or tax consequences depend on your contract. Contact your insurance company to ask whether your annuity permits this and what the terms are.

Tax consequences and the 10 percent early withdrawal penalty

Any amount you withdraw from an annuity that represents gains (not your original contributions) is taxed as ordinary income in the year you withdraw it. If you're under age 59½ when you take the withdrawal, the IRS adds a 10 percent penalty tax on top of the income tax, unless you meet an exception.

The main exceptions to the 10 percent penalty are: you are age 59½ or older; you are disabled; you are the beneficiary of a deceased annuity owner; you are using Rule 72(t) (also called SEPP or substantially equal periodic payments), which requires you to take equal withdrawals over your life expectancy; or the withdrawal is part of a may have access to domestic relations order (QDRO) in a divorce. If you think you may may have access to for an exception, consult a tax professional before withdrawing, because the IRS rules are strict and mistakes can be costly.

Your original contributions (the amount you paid into the annuity) come out tax-free. The insurance company or your tax statement will show you how much of each withdrawal is contributions versus gains, using a calculation called the exclusion ratio.

Annuities inside retirement accounts versus outside

An annuity held inside an IRA, 401(k), or other retirement account follows both the annuity contract rules and the retirement account rules. This creates two layers of restrictions. For example, if you own an annuity inside an IRA and you're under 59½, you face both the annuity's surrender charges and the IRA's 10 percent early withdrawal penalty (unless an exception applies to both).

If you own an annuity outside a retirement account (often called a non-may have access to annuity), you follow only the annuity contract rules and the tax code rules for annuities. You do not have to take required minimum distributions (RMDs) at age 73, and you have more flexibility to withdraw without triggering retirement account penalties — though you still owe income tax and the 10 percent penalty on gains if you're under 59½.

The distinction matters because it changes what options are actually available to you. Before you cash out, confirm whether your annuity is inside or outside a retirement account, because the withdrawal rules will be different.

Steps to request a cash-out or surrender

Start by contacting your insurance company directly — the company that issued the annuity, not your broker or financial advisor. Ask for a current in-force illustration or surrender quote, which shows your current account value, any surrender charges, and the net amount you would receive if you surrendered today. This quote is usually good for 30 days.

Review your annuity contract to confirm the surrender period end date, any free withdrawal provisions, and whether commutation is available. If you're unsure how to read the contract, ask the insurance company to explain the relevant sections in writing.

If you decide to proceed, submit a written request to surrender or withdraw. Some companies allow this online through their website; others require a form or a letter. Keep a copy of your request and any confirmation number. The insurance company will typically process the request within 5 to 10 business days, though some take longer.

The funds are usually sent by check or electronic transfer to your bank account. If the annuity is inside an IRA or retirement account, the company may send the funds to the IRA custodian instead, depending on how the account is structured.

What to consider before cashing out

Cashing out an annuity is permanent — once you surrender it, you cannot undo the transaction. If you later want the may provide income stream the annuity was providing, you would have to buy a new annuity at your current age, which will be more expensive and may have different terms.

Calculate the total cost: add the surrender charge, any income tax owed on gains, and the 10 percent penalty if applicable. Compare this to what you would receive. Sometimes the net amount is significantly less than you expect, and it may not be worth the cost to cash out early.

If you need access to only part of your money, explore whether your contract allows excess withdrawals or partial surrenders before you surrender the entire annuity. Partial options may have lower costs.

If you're considering cashing out because you need money urgently, consider whether there are other sources available first — a line of credit, a loan, or a withdrawal from another account — because the tax and penalty costs of an early annuity withdrawal can be steep.

Frequently Asked Questions

Can I cash out an annuity if I'm still in the surrender period?

Yes, but the insurance company will deduct a surrender charge from your cash surrender value. The charge is a percentage of your balance and decreases each year. Some contracts allow you to withdraw a small percentage (often 10 percent annually) without a charge. Check your contract or ask the insurance company for a surrender quote to see the exact cost.

What is the difference between cash surrender value and what I paid in?

Cash surrender value is your contributions plus any investment gains, minus fees, expenses, and the surrender charge. If your annuity has lost money or you're early in the surrender period, the cash surrender value can be less than what you invested. The insurance company will provide this figure in a surrender quote.

Do I have to pay income tax on a full annuity cash-out?

Yes, on the portion that represents gains. Your original contributions come out tax-free. The insurance company will calculate how much is contributions versus gains using the exclusion ratio and report it to you. If you're under 59½, you also owe a 10 percent IRS penalty on the gains unless you meet an exception.

What is commutation and can I use it?

Commutation is an option to convert your remaining stream of annuity payments into a single lump sum. Not all annuities offer it — it depends on your contract. If available, the insurance company calculates the present value of your remaining payments using a rate set in your contract. Contact your insurance company to ask whether your annuity allows commutation.

What happens if I cash out an annuity inside an IRA?

You face both annuity rules and IRA rules. If you're under 59½, you owe income tax on gains, the 10 percent annuity penalty, and the 10 percent IRA early withdrawal penalty (unless an exception applies to both). The funds may be sent to your IRA custodian rather than directly to you. Consult a tax professional before withdrawing from an IRA annuity.