How Quickly Can You Redeem an Annuity?

by Michael Evans

Annuities, typically purchased through insurance companies, can offer an investment vehicle for your retirement. In the majority of cases, you can redeem an annuity at any time, even if you withdraw funds prior to the date you intended to receive distributions. However, if you withdraw funds earlier than specified in your original agreement, or before reaching a certain age, you may face a penalty from the Internal Revenue Service (IRS) or additional charges from the company that administers your annuity.

Types of Annuities

Annuity accounts are typically deferred or immediate. Deferred annuities allow you to build an investment for use at a later date. A deferred annuity works as a nest egg that accumulates earnings, typically over a period of decades. An immediate annuity allows you to deposit funds from another type of investment vehicle into an account from which you can receive distributions immediately. Immediate annuities typically offer distributions on a monthly basis, calculated according to your life expectancy.

Maturity Date

The maturity date of an annuity, also referred to as an income date, is the date at which you intend to start receiving payments. You must set a maturity date when you start a deferred annuity. Annuity owners typically choose a date based on the age at which they plan to retire. When setting a maturity date, you must also decide how you want to receive your payments, such as monthly or annually. The majority of deferred annuities allow you to change your maturity date if you choose. This enables you to extend the date if you want to accumulate more money before using the funds, or start receiving payments early if you need money.

Surrender Charges

Annuity terms often require you to pay surrender charges if you withdraw funds within a specified number of years after opening an account. If you open a deferred annuity, you typically must keep all funds in the account for a period of up to eight years, referred to as the surrender period. If you choose to withdraw funds before the specified period, the company that administers the annuity may apply surrender charges, which can reduce the value of your investment.

IRS Rules

If you receive annuity payments before reaching the age of 59 1/2, you typically must pay the IRS a penalty of 10 percent, as of the time of publication. The IRS establishes the minimum age because annuities are intended to work as retirement accounts. However, you may be able to avoid the early distribution penalty under certain circumstances, such as if you become disabled or if the original owner of an annuity dies and names you as the beneficiary. In addition to early distribution penalties for people under the age of 59 1/2, the IRS typically taxes withdrawals based on your regular income-tax rate. The amount of tax you must pay can depend on the type of funds contributed to your annuity. If your employer contributed all funds, you typically must pay taxes on all withdrawal amounts. However, if you contributed post-tax funds from your own money, your contributions are non-taxable upon withdrawal.

About the Author

Michael Evans was born in Memphis, Tenn. He graduated from The University of Memphis, earning a Bachelor of Arts degree in communication. His primary course of study was photography and film production. He first began writing professionally for iOwn Inc. in 1997, and was published by LensWork Magazine in 2003.

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