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How do I withdraw funds from an annuity?

How do I withdraw funds from an annuity?Withdrawing funds from an annuity can be done in one of two ways: as a lump sum or in monthly payments.

As investments with moderate to low risk, annuities are an attractive option for people looking to supplement their own retirement without jeopardizing all of their investment dollars in more risky vehicles.

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An individual can invest over a long period of time or with a lump some payment, then watch and wait as the account grows. When the time finally does come for making withdrawals, there are two options: the lump sum withdrawal or the annuitization.

The Annuity as a Contract

Before we begin discussing the two withdrawal options for annuities, it must first be understood that an annuity is a contract. Unlike stocks, which can be bought and sold with impunity, when you open an annuity you are signing a contact which spells out the terms and conditions. Your contract will have something to say about your withdrawal options.

Before choosing an annuity investment, be sure to read the contract carefully. Ask as many questions as you need in order to fully understand what you are signing. If the withdrawal terms are not to your liking, don’t be afraid to walk away and look for a different annuity to invest in.

Lump Sum Withdrawal

A standard annuity contract usually allows for a partial or total lump sum withdrawal at any time. However, certain fees almost always apply.

At the very least you will be assessed a 10% IRS penalty if you are under the age of 59 ½.

Fees charged by the issuer of the annuity vary by contract. The issuing company may also charge a fee as well.

It is not unusual for an issuer to allow up to a certain portion of the value of your annuity to be withdrawn every year without penalty. Penalties of up to 10% may be assessed if you exceed that amount. A total withdrawal before contract maturity will almost always result in punitive penalties and fees.

Annuitized Withdrawals

I withdraw funds from an annuityThe annuitized method of withdrawal is the one most commonly used. Indeed, it’s the reason most people choose the annuity as an investment. This method allows for a set amount to be released to the investor at regular intervals without penalty.

You can choose to have annuitized payments continue for as long as you live, in which case the value of each payment will be determined by your age, the value of the contract, and other factors. You can also choose to have the payments conclude over a set period of time. Such an arrangement usually results in higher payments.

Surrender Charges

Some annuity contacts have what is called a surrender period. So when you can withdraw from an annuity without penalty. This is a period of time in which you cannot withdraw any money from the policy without incurring some sort of penalty. Withdrawing during that period can be quite costly to the investor, incurring an annuity penalty lump sum. Surrender periods typically are less than 10 years.

Exceptions to the surrender period penalties include:

  • The death of the investor
  • Withdrawals to pay the costs of a long-term stay in a medical or nursing facility
  • Unemployment
  • Disability
  • Terminal illness

Surrender period details should be carefully considered before signing an annuity contract.

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Tax Obligations

Contributions to your annuity are tax-free until the time of withdrawal. Investors need to be aware that withdrawals are considered income and are taxed accordingly.

What many do not understand is that any withdrawal, regardless of when it occurs, is made first against earnings rather than principle.

withdraw funds from an annuityThe effect of this system is that the first withdrawals are subject to both income tax and capital gains taxes. The higher your returns are, the more tax you will pay. That’s why the best system for withdrawals on this type of investment are annuitized payments as originally scheduled in the contract. With these payments the investor will avoid adding penalties to the already burdensome taxes on interest income.

Annuities can make a great low risk, low return investment tool for extra income during your retirement. Be sure to know exactly what you are investing in when you take out an annuity policy. The right policy can be very beneficial when withdrawal times comes; but, it could also be a detriment if you must withdraw early.

Don’t be afraid to shop around to find the best annuity. Check with your insurance provider, local bank, or investment broker. Talk to friends and relatives who have experience with these investments. In a nutshell, be sure that your decision is an informed one.

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