The tax free part is considered the return of your net cost for purchasing the annuity. According to irs publication 575 most distributions both periodic and nonperiodic from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59 are subject to an additional tax of 10 percent.
If your annuity is a recent investment you may be able to get out of it during the contract s free look period.
How to get money out of an annuity tax free. Here s what you need to know about your options both the good and the bad before dissolving an annuity contract. First to the extent the annuity is deferred taxation on the growth in the annuity s value is income tax deferred until distributions are made from the. Many annuity contracts allow their owners to withdraw as much as 10 to 15 percent annually without paying surrender fees or other penalties.
You may be free to withdraw money at your discretion as far as the insurer is concerned but if you are under the age of 59 the irs will charge you a 10 percent penalty. If you take money out of an annuity before you turn 59 1 2 and you don t qualify for any exceptions to the general rule then you will have to pay an additional 10 penalty on the withdrawal on. If all of the money you invested was pretax or tax deductible for example if you bought the annuity within a 401 k or traditional ira all of your withdrawals will be subject to income taxes.
Your contract year begins the day you sign the annuity contract and ends 364 days later some annuities. The free look provision. Even non qualified annuities those purchased with after tax dollars and not held in a retirement account require the owner to reach the age of 59 before taking penalty free distributions.
The quickest way to access annuity money is to borrow it but this isn t allowed in an individual retirement annuity. The rest is the taxable balance or the earnings. Most annuities offer a surrender free withdrawal option available in each contract year.
This is essentially a window of time in which you can test drive the annuity to make sure you re comfortable with keeping it. When you receive income payments from your annuity as opposed to withdrawals the idea is to evenly divide the principal amount and its tax exclusions out over the expected number of payments. Take your money piecemeal.
There are two basic income tax rules. Health people in poor health will likely gain less benefit from an annuity since they may not live long enough to receive many income payments.