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When Should I Start Taking Money Out of My Annuity?
by
JG Wentworth
•
April 3, 2024
•
5 min
An annuity is a financial product that provides a stream of income payments over a specified period, typically used for retirement savings. While annuities are designed to provide long-term financial security, there are situations where individuals may need to withdraw money from their annuity earlier than planned.
If you’re receiving an annuity and are considering doing this, it’s crucial to understand the requirements involved in making a withdrawal, and the pros and cons associated with doing so.
Types of Annuities
Annuities come in various types, including:
- Fixed annuities: Provide guaranteed interest rates and income payments.
- Variable annuities: Offer investment options with potential for higher returns but carry market risk.
- Immediate annuities: Start providing income immediately after purchase.
- Deferred annuities: Payments begin at a future date chosen by the annuitant.
The type of annuity you have will impact when and how withdrawals can be made.
Reasons to Consider Withdrawing Money
Withdrawals can provide flexibility to adapt to changing life circumstances and meet short-term financial goals. Here are some of the most common reasons you might want to pull money from your annuity:
- Financial hardship: Individuals facing financial hardship, such as unexpected medical expenses or job loss, may need to access funds from their annuity to cover immediate expenses.
- Major life events: Purchasing a home / home renovations, expecting a child, funding education expenses, or starting a business, may warrant withdrawing money from an annuity to finance these endeavors.
- Market opportunities: During periods of favorable market conditions, individuals may choose to withdraw money from their annuity to capitalize on investment opportunities or pay off high-interest debt. However, withdrawing money from a variable annuity during market downturns may result in selling investments at a loss.
Withdrawal Options
Annuity contracts typically specify various withdrawal options, including:
- Partial withdrawals: Allows the annuitant to withdraw a portion of the account balance.
- Systematic withdrawals: Provides regular payments over a specified period.
- Surrender withdrawals: Involves canceling the annuity contract and withdrawing the entire account balance.
The availability and terms of these withdrawal options vary depending on the annuity contract and the insurance company issuing it, so be sure to read over any fine print and/or consult with your financial advisor before making any decisions.
Sell Your Annuity to JG Wentworth*
Requirements for Annuity Withdrawals
The following are some general requirements involved with taking money out of annuities.
- Age limit: Withdrawals before age 59½ may incur a 10% early withdrawal penalty, in addition to income tax.
- Tax implications: Withdrawals from annuities funded with pre-tax dollars, such as traditional IRAs or 401(k) annuities, are generally taxable as ordinary income. Withdrawals from annuities funded with after-tax dollars, such as Roth IRAs or non-qualified annuities, may be partially or entirely tax-free, depending on the circumstances.
- Surrender charges: Surrendering an annuity contract and withdrawing the entire account balance may incur surrender charges imposed by the insurance company. Surrender charges typically decrease over time and may be waived or reduced after a specified surrender charge period.
Pros and Cons of Annuity Withdrawals
And now to break it all down so you can make an informed decision one way or another…
Pros:
- Liquidity: Allows individuals to access funds when needed for emergencies or financial opportunities.
- Flexibility: Offers the flexibility to adapt to changing financial circumstances and meet short-term financial goals.
- Tax advantages: Withdrawals from certain types of annuities may be tax-deferred or tax-free, depending on the circumstances.
Cons:
- Taxes and penalties: Early withdrawals from qualified annuities may incur income taxes and a 10% early withdrawal penalty.
- Reduction of future income: Withdrawing money from an annuity reduces the account balance and future income payments.
- Surrender charges: Surrendering an annuity contract may result in surrender charges imposed by the insurance company, reducing the amount of funds available for withdrawal.
Selling Your Annuity Payments to JG Wentworth*
If you have any questions regarding your annuity, feel free to contact JG Wentworth to speak with our dedicated specialists. To avoid complicated, expensive fees and penalties many annuitants opt to sell their payments to us. This allows them to get their cash on their terms, when they need it.
- Call to get a quote: When you call us with an idea of how much cash you need, our representative determines your eligibility to sell and provides you with a quote.
- Complete and submit your paperwork: Once you accept a quote, you’ll be asked to sign and return a contract to us confirming the terms of your agreement. From there, your JG Wentworth team will handle any paperwork necessary to complete the transaction.
- Obtain annuity company approval: In order for JG Wentworth to purchase your annuity payments we must obtain the approval of the insurance company that issues the payments. We have experience working with most insurance companies and can usually obtain approval without issue.
- Receive your lump sum: We can pay you via wire transfer, direct deposit, or check— whatever you prefer.
Making Informed Decisions
Withdrawing money from an annuity should be approached thoughtfully, considering your financial needs, goals, and circumstances. While annuity withdrawals offer liquidity and flexibility, they may come with tax implications, penalties, and potential reduction of future income payments.
Always be sure to review the terms of your annuity contracts, assess the tax implications, and consult with a financial advisor to make informed decisions aligned with your long-term financial goals. By understanding when and how to withdraw money from your annuity, you can navigate financial challenges and opportunities while preserving your security and well-being.
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* Sales of annuity payment require insurance company approval and are subject to certain conditions. Call for details All transactions are at JG Wentworth’s sole discretion.