A deferred annuity is a type of insurance policy that earns interest and eventually pays out a guaranteed income for a set period of time. If you need access to the money in your annuity before you start taking an income, you can make a withdrawal, which may have tax consequences, or you may be able to borrow against your deferred annuity, depending on the terms of your policy.
Deferred annuities defer taxes on the interest your annuity earns until you withdraw money from the annuity. This allows the interest to grow faster, as you're not making regular withdrawals to pay taxes. You can make withdrawals from the annuity without annuitizing the annuity. Annuitizing the annuity means taking a guaranteed income stream.
Borrowing Pros and Cons
Borrowing from your annuity doesn't have the same potential tax consequences that making an early withdrawal from an annuity does. If you're younger than age 59 1/2 and you make an annuity withdrawal, you must pay an early withdrawal penalty of 10 percent, in addition to any taxes due. If you borrow, you don't have that penalty, unless you don't pay back the loan. In that case, your loan would be considered a withdrawal and you'd be responsible for any penalties and taxes due.
How to Borrow Against Your Annuity
Your annuity policy will outline whether you can borrow against your annuity. If you can't find your policy, or the policy terms aren't clear, call your insurance company and find out if you can take out a policy loan, and, if so, how much you can borrow and what the interest rate and repayment terms are. If you want to move forward with the loan, ask for the form needed to request a loan. Fill out the paperwork and return it via mail, fax or email.
Alternative to Borrowing
One alternative to borrowing is making a withdrawal from your annuity, and if you're older than age 59 1/2, you won't incur an early withdrawal penalty. Another alternative is using your annuity as collateral to take out a separate loan from a financial institution, like a bank or credit union. This would also avoid penalties, unless you failed to pay back the loan.