When to Start Taking Money From Your Annuity

The timing depends on your contract and your needs, not on a single right answer

When you can start taking money from an annuity depends on what type of annuity you own and what your contract says. Some annuities let you withdraw money right away. Others lock your money until you reach a specific age — often 59½ — or until a set number of years have passed. The contract you signed when you bought the annuity spells out these rules, including any penalties for early withdrawal.

Beyond what the contract allows, the question of when you should take money is about your personal situation: whether you need the income now, what your tax situation looks like, and whether you want the money in a lump sum or spread over time. This guide explains how annuity withdrawal rules work and what to consider when you're deciding.

Key Takeaways

• Your annuity contract sets the earliest date you can withdraw money without a penalty, which is often age 59½ for deferred annuities.
• Withdrawing before that date usually triggers a surrender charge — a percentage of the amount you take out — plus income tax and potentially a 10% federal penalty.
• when ready annuities begin paying you within a year of purchase, while deferred annuities let your money grow until you decide to start withdrawals.
• Once you reach the withdrawal date your contract allows, you can choose a lump sum, regular monthly payments, or a combination depending on your annuity type.
• Talking to a tax professional before you withdraw is worth the cost, because the tax treatment of annuity withdrawals varies based on how much of your payment is earnings versus your original investment.

What your annuity contract says about withdrawal dates

Your annuity contract contains a section on surrender charges and free withdrawal periods. The surrender charge is a penalty you pay if you take out more than a certain amount before a set date. This date is usually 5 to 10 years after you bought the annuity, though some contracts extend longer.

For example, a contract might say you can withdraw up to 10% of your account value each year without penalty, but anything above that triggers a 7% surrender charge. If you withdraw $50,000 and the contract allows only $5,000 penalty-free, you would owe 7% on the $45,000 — that's $3,150 in surrender charges alone, plus income tax on the earnings portion.

Find your contract or call your annuity provider to ask: "What is my surrender period end date?" and "How much can I withdraw penalty-free each year?" Write down both answers. These are the hard limits set by your specific annuity.

The difference between when ready and deferred annuities

An when ready annuity starts paying you within a year of purchase. You give the insurance company a lump sum, and they begin sending you monthly or annual payments right away. You do not choose when to start — the payments begin on a schedule you set when you bought it. If you need income now and bought an when ready annuity, the timing question is already answered: the money flows automatically.

A deferred annuity lets your money sit and grow for years before you take anything out. You control when to start withdrawals, within the limits your contract sets. Most deferred annuities have a free withdrawal date — often at age 59½ or after a certain number of years — when you can start taking money without surrender charges. Before that date, you can still withdraw, but you will pay the penalty.

If you own a deferred annuity and have not yet reached the free withdrawal date, the question of when to start is yours to answer based on whether you need the money and whether the surrender charge is worth paying.

Age 59½ and why it matters for taxes and penalties

The age 59½ threshold appears in many annuity contracts because it is the age the IRS uses for retirement accounts. If you withdraw from an annuity before age 59½ and your contract does not have a specific exception, you may owe a 10% federal penalty on the earnings portion of your withdrawal — on top of income tax and any surrender charge your contract imposes.

This does not mean you cannot withdraw before 59½. It means the cost is higher. A 10% IRS penalty plus a 7% surrender charge plus income tax could easily take 40% or more of what you withdraw. Whether that cost is worth paying depends on how badly you need the money and whether other options exist.

Once you turn 59½, the 10% IRS penalty goes away, though your contract's surrender charge may still explore if you are still in the surrender period. At the end of your surrender period, you can withdraw without either penalty — you will still owe income tax on the earnings, but that is unavoidable.

Lump sum versus regular payments

Once you reach a date when you can withdraw without penalty, you have choices about how to take the money. Some annuities let you take a single lump sum. Others require you to annuitize — convert your balance into a stream of regular payments that last a set number of years or for your lifetime. Many contracts offer both options.

A lump sum gives you all the money at once. You control how to spend or invest it, but you also take on the risk that you will run out of money if you live longer than expected. The entire lump sum is taxable in the year you withdraw it.

A lifetime payment option sends you a fixed amount each month for as long as you live. The insurance company takes the longevity risk — if you live to 100, they keep paying. Each payment is partly a return of your original investment (not taxed) and partly earnings (taxed as income). This spreads the tax bill over many years instead of one large hit.

A period-certain option pays you for a set number of years — say, 20 years — regardless of whether you live that long. If you die before the period ends, your beneficiary receives the remaining payments. This is a middle ground between a lump sum and lifetime payments.

How taxes work on annuity withdrawals

Not all of your annuity withdrawal is taxable. Your withdrawal is split into two parts: your cost basis (the money you originally invested) and earnings (the growth your money made). You do not owe income tax on your cost basis — you already paid tax on that money when you earned it. You owe tax only on the earnings.

The IRS uses a formula called the exclusion ratio to determine what portion of each payment is earnings and what portion is your cost basis. For a lifetime annuity, this ratio stays the same for your entire life. For a lump sum, the calculation is simpler: the IRS treats withdrawals as earnings first until all earnings are withdrawn, then the rest is cost basis (this is called LIFO, or last-in-first-out).

This matters because it affects how much tax you owe. If you withdraw a lump sum before reaching the end of your surrender period, you might owe a surrender charge, a 10% IRS penalty, income tax on the earnings, and possibly state income tax — all in one year. A tax professional can show you the actual cost before you withdraw.

Reasons to wait versus reasons to withdraw early

You might wait to withdraw if you do not need the money yet and want to avoid surrender charges and the 10% IRS penalty. Letting the money stay invested means it continues to grow, and you delay the tax bill. If you are still working and in a high tax bracket, waiting until you retire — when your income is lower — can reduce the tax you owe on the withdrawal.

You might withdraw early if you have a genuine need for the money now and no other source to tap. A medical emergency, a home repair, or a job loss can make the cost of early withdrawal worth paying. In that case, calculate the actual cost — surrender charge plus taxes plus penalty — before you decide. Sometimes the cost is lower than you expect, and sometimes it is higher.

You might also withdraw early if you are unhappy with how your annuity is performing or if you have found a better investment. Some annuities charge high fees or offer low returns. If that is your situation, a tax professional can help you weigh whether the cost of withdrawal is less than the cost of staying in a bad annuity for years.

What to do before you withdraw

Before you contact your annuity provider to start a withdrawal, gather three pieces of information. First, pull out your annuity contract or call the provider and ask for a current statement that shows your account balance, your cost basis, and your surrender period end date. Second, note your age and whether you have reached 59½. Third, think about whether you want a lump sum or regular payments, if your contract offers both.

Then talk to a tax professional — a CPA or tax attorney — before you withdraw. The cost of an hour of their time is almost always less than the tax bill you will owe, and they can show you whether withdrawing this year or next year makes a difference. They can also tell you whether the withdrawal will push you into a higher tax bracket or affect other benefits you receive.

Once you have that information, contact your annuity provider and ask them to walk you through the withdrawal process. They will send you forms to sign, explain the timeline for the money to reach you, and confirm the tax withholding they will explore. Do not rush this step — ask questions until you understand what will happen and when.

Frequently Asked Questions

Can I withdraw from my annuity without paying a surrender charge?

Yes, if you have reached the end of your surrender period — usually 5 to 10 years after you bought the annuity, or at age 59½, depending on your contract. You can also withdraw up to a certain percentage each year (often 10%) without penalty. Check your contract or call your provider to find out your specific free withdrawal date and amount.

What happens if I withdraw before age 59½?

You may owe a 10% federal penalty on the earnings portion of your withdrawal, in addition to income tax and any surrender charge your contract imposes. The total cost can be substantial. However, some annuities have exceptions for hardship or disability. Ask your provider whether an exception applies to your situation.

Is it better to take a lump sum or monthly payments?

That depends on your situation. A lump sum gives you control and flexibility but puts the longevity risk on you. Monthly payments spread the tax bill over time and may provide income for life (if you choose that option), but you lose access to the full balance. A tax professional can show you the after-tax income from each option.

Do I have to withdraw all my money at once?

Not necessarily. Many annuities let you take partial withdrawals or set up regular payments without annuitizing the entire balance. Some let you take a lump sum and leave the rest to grow. Your contract spells out what options are available. Ask your provider what combinations they allow.

What if I need money but do not want to pay the surrender charge?

Explore other options first: a personal loan, a home equity line of credit, or borrowing from a retirement account if you have one. If the annuity is your only option, calculate the actual cost of withdrawal — it may be lower than you think, or it may be high enough that borrowing elsewhere makes more sense. A financial advisor can help you compare.