Annuities are one of the most common forms of saving for retirement. They are good for deferring taxes on contributions up until a certain age, or as a safeguard against a life-altering event. However, if you choose to withdraw your annuity early, the earnings could be taxed as ordinary income. You must pay an additional 10 percent on the withdrawal as a penalty to the IRS, and you may have to pay a fee, referred to as a surrender fee, to the manager of your annuity fund. So the best time to withdraw money is after you reach age 59 1/2.
An annuity is an investment contract between you and a financial-services firm, which usually is an insurance company. The goal is to provide retirement income on a tax-deferred basis. As your contributions accumulate, your annuity grows, leaving you with a variety of options when you're ready to start withdrawing.
Withdrawals from annuities are generally taxed at 10 percent before age 59 1/2. The 10 percent serves as a penalty for early withdrawal. Once you've reached 59 1/2 you can withdraw your money in one of two ways: through a partial or total lump sum, without having to pay a tax penalty. In addition to a penalty, most annuities charge a surrender fee for making withdrawals before a certain time. The surrender charges vary from annuity to annuity and will decrease over time. For instance, surrender or withdrawal charges may be 10 percent in the first year and 5 percent in the 10th.
There are cases in which a surrender charge can be waived, including death, continuous confinement (30 days or more) in a nursing home facility, terminal illness or unemployment.