Withdrawing Money From an Annuity: Options, Penalties & Smarter Alternatives

Withdrawing money from an annuity before the surrender period ends or before age 59½ can cost you 20% to 30% in surrender charges, IRS penalties, and taxes. Selling future payments to a buyer like CSF avoids both the surrender charge and the 10% IRS penalty.

Your Options for Withdrawing Money From an Annuity

• Full surrender: Terminate the contract entirely and receive the cash surrender value
• Partial withdrawal: Take some funds while keeping the rest in force
• Free withdrawal provision: Access up to 10% per year without surrender charges
• Systematic withdrawal: Set up regular automated withdrawals
• 72(t) distributions: Series of equal periodic payments that avoid the IRS 10% penalty
• Sell future payments to CSF: Receive a lump sum now in exchange for a portion of your future payment stream, no surrender charge, no IRS penalty

The Free Withdrawal Provision

Almost every annuity contract includes a "free withdrawal" provision allowing you to withdraw up to 10% of the account value per year without surrender charges. Example: $200,000 annuity in year 3 of a 7-year surrender period, you can withdraw up to $20,000 without surrender charge. Important caveat: the IRS 10% early withdrawal penalty may still apply if you're under 59½.

Before using your free withdrawal, check three things in your contract. First, confirm whether the 10% applies to the original premium or the current account value, as contracts define it differently. Second, verify whether unused free withdrawal amounts roll over to the next year. Most contracts do not allow rollovers, so the 10% resets annually. Third, check whether the free withdrawal resets the surrender period clock. In most contracts it does not, but some variable annuity contracts have different rules. Your annuity statement or certificate page lists the exact free withdrawal terms.

The IRS 10% Early Withdrawal Penalty

The IRS treats annuity withdrawals before age 59½ the same way it treats early withdrawals from IRAs and 401(k)s: it imposes a 10% penalty on the taxable portion of the withdrawal. This penalty is in addition to ordinary income tax on any gains. For a $50,000 withdrawal with $30,000 in gains, the 10% penalty alone costs $3,000, on top of whatever income tax you owe on the $30,000.

There are limited exceptions to the 10% penalty: disability, death (payments to beneficiary), annuitization through 72(t) substantially equal periodic payments, or a qualified first-time home purchase (for IRA-based annuities). Outside these exceptions, the penalty applies. The IRS provides details in Publication 575.

Selling future payments to CSF is not considered a "withdrawal" by the IRS. You are selling a property right (the right to receive future payments), not withdrawing funds from the annuity contract. The contract stays in place, and the 10% penalty does not apply.

Surrender Charges: What They Are

A surrender charge is the insurer’s fee for terminating your annuity contract during the surrender period. Your state’s department of insurance can help you understand your contract rights. Typical 7-year schedule:

Contract Year	Surrender Charge	On $100,000 Annuity
Year 1	7%	$7,000
Year 2	6%	$6,000
Year 3	5%	$5,000
Year 4	4%	$4,000
Year 5	3%	$3,000
Year 6	2%	$2,000
Year 7	1%	$1,000
Year 8+	0%	None

Sell Future Payments Instead: The Alternative Most Don't Know

Most annuity holders assume surrendering is the only way to access their money. Selling future payments to a structured settlement buyer is a legally distinct transaction that avoids the two biggest costs of surrendering. When you sell to CSF, the annuity contract stays in place, you're not terminating it. The insurer continues making payments on schedule, but they go to CSF instead of you. This means:

• No surrender charge: You're not terminating the contract, so no insurer fee applies
• No IRS early withdrawal penalty: You're selling future payment rights, not making a "withdrawal"
• You pay nothing out of pocket
• Partial sales available: Sell only the payments you need; keep the rest

Option	Surrender Charge	IRS Penalty (Under 59½)	Fees to CSF	Partial Option
Full surrender	Yes (if in period)	Yes	N/A	No
Free withdrawal (10%)	No (on 10% amount)	Yes (on taxable gains)	N/A	Yes (limited to 10%/year)
Sell to CSF	No	No	Zero	Yes, any portion

For more detail, see our complete guide on cashing out an annuity. To estimate what your payment stream might be worth, try our annuity calculator.

When Does Surrendering Actually Make Sense?

Surrendering your annuity is not always the wrong choice. If the surrender period has already ended (0% charge), and you are over age 59½ (no IRS penalty), surrendering may be the simplest path. You contact the insurer, request the cash surrender value, and receive a check.

However, if either the surrender charge or the IRS penalty applies, the combined costs can be substantial. A $100,000 annuity in year 2 of a 7-year surrender period, held by someone under age 59½, could cost $6,000 in surrender charges plus a 10% penalty on taxable gains plus ordinary income tax on those gains. Selling to CSF avoids the first two costs entirely.

If you are unsure which option is better for your situation, CSF can provide a free side-by-side comparison showing what you would receive from surrendering versus selling. Call (800) 317-3769 or visit our annuities page to learn more about how selling annuity payments works.

Frequently Asked Questions: Withdrawing From an Annuity

Can you withdraw money from an annuity without penalty?

Yes, under certain conditions: after the surrender period ends (0% surrender charge), within the annual free withdrawal provision (typically 10% per year), or after age 59½ (no IRS penalty). Selling future payments to CSF avoids both the surrender charge and IRS penalty.

What is the penalty for withdrawing from an annuity?

Two potential penalties: (1) a surrender charge from the insurer, typically 6–10% in year one, decreasing annually; and (2) a 10% IRS early withdrawal penalty if under age 59½. Combined with income tax on gains, these costs can reduce what you receive by 20–30% or more.

What is a free withdrawal provision?

Most annuities allow withdrawal of up to 10% of account value per year without any surrender charge. The IRS early withdrawal penalty (if under 59½) may still apply to the taxable portion of these withdrawals.

Is it better to surrender an annuity or sell the payments?

For most people within the surrender period or under age 59½, selling payments to CSF is significantly better than surrendering. Surrendering triggers the surrender charge AND the IRS penalty AND income tax on gains. Selling to CSF: no surrender charge, no IRS penalty.

What is a 72(t) distribution?

A 72(t) distribution allows annuity or retirement account holders to take regular distributions before age 59½ without the 10% IRS penalty. The payments must continue for at least 5 years OR until age 59½ (whichever is longer). Modifying payments before the required period ends restores the penalty retroactively.

At what age can I withdraw from an annuity without the IRS penalty?

Age 59½, the same threshold as IRAs and 401(k)s. Surrender charges from the insurer may still apply regardless of age until the surrender period ends.