Annuity – An annuity is a financial product that provides you with a guaranteed regular income, typically during your retirement. However, there may be situations where you need to access your money sooner than planned. In this article, we will explain how to cash out an annuity, what are the pros and cons of doing so, and what are the alternatives to consider.
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What is an Annuity and How Does it Work?
An annuity is a contract between you and an annuity provider, usually a life insurance company. You pay a lump sum or make multiple payments over time to the provider, and in return, you receive income payments for a fixed period or for as long as you live.
There are different types of annuities, such as:
- Variable annuities: Your income payments vary depending on the performance of the underlying investments that you choose.
- Fixed annuities: Your income payments are fixed and guaranteed by the provider.
- Fixed index annuities: Your income payments are linked to the performance of a market index, such as the S&P 500, but with a minimum guaranteed rate.
- Immediate annuities: You start receiving income payments right away after buying the annuity.
- Deferred annuities: You defer receiving income payments until a later date, such as your retirement.
- Deferred income annuities: You defer receiving income payments until a specific age, such as 85.
- Qualified longevity annuity contracts: You defer receiving income payments until a specific age, such as 85, and use a portion of your retirement savings to buy the annuity.
The amount and frequency of your income payments depend on several factors, such as:
- Your gender, age, and health status when you buy the annuity
- The amount of money you invest in the annuity
- The type of annuity you buy
- Whether you have the option to continue payments to a beneficiary or your estate after you die
- The length of time you want to receive payments
- The rate of interest when you buy your annuity
- The annuity provider
Can You Cash Out an Annuity?
The answer depends on the type of annuity you have and the terms of your contract. Generally speaking, most deferred annuities can be cashed out before you start receiving payments, but immediate annuities and annuitized contracts cannot be cashed out.
If you want to cash out a deferred annuity, you have several options:
- Withdrawals: You can withdraw money from your annuity account at any time, subject to withdrawal limits and tax implications. However, if you withdraw more than the allowed amount or before a certain period, you may incur surrender charges or penalties from the provider.
- Surrender: You can surrender your annuity contract for its cash value, which is the amount of money left in your account after deducting any fees or charges. This option is usually available only for fixed and variable annuities. However, if you surrender your contract before the end of the term, you may incur surrender charges or penalties from the provider.
- Loans: You can take out a loan against the cash value of your annuity. This option is usually available only for fixed annuities. However, if you fail to repay the loan or interest on time, you may lose your contract or reduce your income payments.
- Waivers: You can cash out your annuity without penalty if you qualify for certain waivers, such as entering a nursing home, becoming disabled, or becoming unemployed. This option depends on the provider and the contract terms.
- Return of premium: You can get all of your money back if you cancel your contract within a specified period. This option depends on the provider and the contract terms.
If you have an immediate annuity, a deferred income annuity, a qualified longevity annuity contract, or an annuitized contract, you cannot cash out your annuity before you die. These types of annuities are designed to provide lifetime income and do not have a cash value.
What are the Pros and Cons of Cashing Out an Annuity?
Cashing out an annuity may seem like an attractive option if you need money urgently or have another use for it. However, there are also some drawbacks that you should consider before making this decision. Here are some of the pros and cons of cashing out an annuity:
Pros
- You get access to your money sooner than planned
- You can use your money for other purposes, such as paying off debt, investing in other opportunities, or spending on personal needs
- You can avoid future market risks or interest rate fluctuations that may affect your income payments
- You can reduce or eliminate future fees or charges that may reduce your income payments
Cons
- You may lose the guaranteed lifetime income that an annuity provides
- You may incur surrender charges or penalties that reduce the amount of money you receive
- You may have to pay income taxes and possible penalties on the money you receive
- You may lose the protection of your money from creditors or lawsuits that an annuity provides
- You may lose the benefits of your annuity, such as inflation protection, death benefits, or income riders
What are the Alternatives to Cashing Out an Annuity?
If you are not satisfied with your annuity or need money for other reasons, cashing out your annuity may not be the best option. There may be other alternatives that can help you achieve your goals without losing the benefits of your annuity. Here are some of the alternatives to cashing out an annuity:
- Exchange: You can exchange your annuity for another annuity that suits your needs better. This option is also known as a 1035 exchange and allows you to transfer your money from one annuity to another without paying taxes or penalties. However, you may still incur surrender charges or fees from the providers.
- Sell: You can sell your annuity payments to a third-party company for a lump sum of money. This option is also known as a structured settlement and allows you to get cash for your future income payments. However, you may receive less money than the total value of your payments and have to pay taxes and fees on the transaction.
- Partial withdrawal: You can withdraw a portion of your money from your annuity account without surrendering your contract. This option allows you to keep some of your income payments and some of your benefits. However, you may still incur withdrawal limits, taxes, and fees on the money you withdraw.
- Partial surrender: You can surrender a portion of your annuity contract for its cash value without surrendering the entire contract. This option allows you to keep some of your income payments and some of your benefits. However, you may still incur surrender charges, taxes, and fees on the money you receive.
In conclusion, an annuity is a financial product that provides you with a guaranteed regular income, typically during your retirement. However, there may be situations where you need to access your money sooner than planned. In this article, we explained how to cash out an annuity, what are the pros and cons of doing so, and what are the alternatives to consider.
Cashing out an annuity is a major decision that can have significant financial and personal consequences. Therefore, it is important to weigh all the options carefully and consult a professional financial advisor before making this decision.
Frequently Asked Questions (FAQ): How to Cash Out an Annuity: A Complete Guide for 2023
How do you cash out an annuity?
You can cash out an annuity by withdrawing money from your account, taking out a loan against your cash value, surrendering your contract for its cash value, or selling your future payments to a third-party company. However, each option has its pros and cons, such as taxes, fees, penalties, and loss of income stream.
Can you cash out an annuity early?
You can cash out an annuity early if you have a deferred annuity that has not started paying you income. However, you may face surrender charges or penalties from the provider, as well as a 10% penalty tax from the government if you are under 59 ½ years old.
Can you withdraw money from an annuity?
You can withdraw money from an annuity if you have a fixed, indexed, variable, or long-term care annuity. However, you may have to pay taxes and fees on the money you withdraw, and you may reduce your future income payments. Some annuities, such as immediate, deferred income, qualified longevity, or annuitized contracts, do not allow withdrawals.
Can you cash out a deferred annuity?
You can cash out a deferred annuity if you have not started receiving income payments from it. You can choose from various options to cash out a deferred annuity, such as withdrawal, loan, return of premium, surrender, or crisis waiver. However, each option has its advantages and disadvantages.
Should you cash out an annuity?
The answer depends on your personal and financial situation, goals, and needs. Cashing out an annuity may be a good option if you need immediate cash, have other reliable sources of income, or want more flexibility and control over your money. However, cashing out an annuity may also have drawbacks, such as losing the guaranteed lifetime income, paying taxes and fees, and losing the benefits of the annuity.
What happens if you withdraw money from an annuity before maturity?
If you withdraw money from an annuity before it matures, you may have to pay a surrender charge to the insurance company, as well as a 10% penalty tax to the government if you are under 59 ½ years old. You may also reduce your future income payments and benefits from the annuity.
Can you withdraw money from an annuity if you’re still in a surrender charge?
You can withdraw money from an annuity even if you’re still in a surrender charge period, but you may have to pay a fee to the insurance company. The amount of the fee depends on how long you have owned the annuity and how much money you withdraw. Some annuities may allow you to withdraw a certain percentage of your money each year without paying a fee.
How long do annuities last?
The length of an annuity depends on the type of annuity and the terms of the contract. Some annuities last for a fixed period, such as 10 or 20 years. Some annuities last for as long as you live, or as long as you or your beneficiary lives. Some annuities last until you reach a certain age, such as 85.