Can I Get My Lump Sum Early From My Annuity?

by Jack Ori, studioD

An annuity is a tax-deferred investment account. When you put money into the account, the money is invested so that it will grow. Annuities are similar to retirement accounts in that you can't withdraw money early without incurring tax penalties; however, there is no minimum age at which you must begin taking distributions from an annuity. It is usually cheaper to get periodic distributions than take a lump-sum distribution, as lump-sum distributions may significantly raise your income and you may have to pay tax penalties if you take the distribution too early.

Tax Penalties

In most cases, you cannot withdraw money from your annuity before you reach the age of 59 1/2. If you withdraw money early, you have to pay a 10 percent penalty tax and may have to pay a surrender fee to the company that owns your annuity fund. In addition, you have to pay taxes on the income you receive from your annuity, which can put you into a higher tax bracket.

Periodic Withdrawals

In some cases, you can avoid the 10 percent penalty tax by taking a number of periodic withdrawals rather than by taking a lump-sum withdrawal. You must take a distribution at least once a year for a certain number of years and must calculate your annual distribution using a formula for annuities. Since the Internal Revenue Service rules about periodic withdrawals can be complicated, you may want to ask a financial planner to help you determine whether your withdrawals fit the legal description for exemption.

Investment Length

Even if you are over the age of 59 1/2, the annuity company can still charge you fees for early withdrawal of your investment. When you open an annuity fund, you usually have to agree to keep the money in the fund for a certain period, typically five to seven years. If you take your distribution earlier than that, the company can charge you penalties.

Types of Annuities

How much you can withdraw at a time without incurring penalties depends on the type of annuity. Immediate annuities don't allow you to get a lump-sum distribution without facing penalties -- you must get periodic distributions. Some annuities are longer-term, requiring you to hold your funds for several years, while other annuities require you to hold assets for a shorter length of time.

About the Author

Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.

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