How to Liquidate an Annuity

by Ciaran John, studioD

When you enter into a deferred annuity contract, you exchange a premium payment for the guarantee of a future income stream. Your premium grows during the accumulation phase, and you can either liquidate the contract or convert the contract into an income stream when the accumulation phase ends. You can also liquidate your contract during the accumulation phase, however, the annuity company may require you to pay contract surrender fees. Annuity contracts grow tax-deferred, which means you have to contend with taxes when you liquidate the contract.

Locate your annuity contract if you bought it recently to see if the contract includes a free look provision. In some states, such as Florida, insurance laws require annuity companies to include a free look provision in your deferred annuity contract. This free look period can last up to 30 days, and you can withdraw your funds without penalty if you are still within this time frame without paying surrender fees. Withdrawals outside this time frame usually result in penalties, unless your contract has matured.

Read your annuity contract to see whether you have a fixed, variable or an equity-indexed annuity. The contract must detail the annuity maturity date, and if this date has passed then you can withdraw your funds without penalty. On most fixed annuity contracts you can withdraw your principal at any time, although you may pay interest penalties. On variable and equity indexed annuities, withdrawals prior to the end of the contract usually result in principal and interest penalties.

Contact the annuity company to get the contract surrender value, and the sum total of any applicable fees and charges. The surrender value may differ from the contract value because the contract value forms the basis of your eventual income stream -- assuming you keep funds in the account until maturity. If you cash in the contract you just get the current cash value, which often amounts to less than the contract value.

Tell a representative at the annuity provider how much of the proceeds you want withheld to cover federal income tax. Unless instructed otherwise, annuity companies have to withhold 10 percent of your disbursement for federal taxes. In some states, funds are also withheld to cover state income tax. You can request to have additional funds withheld for taxes, or you can choose to have no money withheld, in which case you must pay the taxes before the tax year ends.

Instruct the representative to liquidate the contract and to send the proceeds to you via check or wire transfer. You may have to pay a fee to have funds sent electronically or via overnight express delivery.


  • You have to pay ordinary income tax on any funds that you withdraw from an annuity contract that have not previously been taxed. You also pay a 10 percent penalty on these funds if you withdraw money from the account before you reach the age of 59 1/2. Therefore, you should avoid investing money in an annuity if you intend to access the funds before you reach that age.


  • Surrender penalties on variable annuities often amount to 7 percent of the cash value, while penalties on equity-indexed annuities are usually higher. You pay these fees in addition to taxes and possible tax penalties. With a variable annuity, your funds are invested in mutual funds, and these funds could drop in value. In a worst case scenario your annuity contract may have no actual cash value if the prices of the underlying shares drop to zero. However, the insurance guarantees on the account mean that you normally get some money back, as long as you take it in the form of a lifetime income stream.

About the Author

Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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