An annuity is, at heart, a contract between a private or commercial party and generally an insurance company where the party gives the insurance company a lump sum and the company promises a rate of return and eventual payout after a fixed period of time. Since the insurance company's interest is to have the money now, to allow withdrawal defeats the purpose of the contract. Hence, most annuities will have high surrender charges (fees to take out the money).
Early Withdrawals and Penalties
Many deferred fixed annuities allow up to 10 percent of the contract value to be withdrawn each year without having to pay the surrender charge. Simply review the contract and contact the agency that sold the annuity to clarify terms of withdrawal, how much is permitted and if penalties apply.
If one withdraws the entire amount, generally before age 59-1/2, the IRS can levy a 10 percent penalty on gains in addition to income tax rates on the full amount.
Another way to take your money out of an annuity is through withdrawals based on need; however, every dollar is taxed at income rates up to 39.6 percent.
Long-term Withdrawals
While CDs generally allow a person to take the money after months or a few years, annuities generally mean the money is trapped for decades (hence the better rates paid out). If you must take out money before the annuity matures, you can "annuitize" the money, meaning the insurance company administers regular payments. The downside is that you give up flexibility and you won't have access to the principal. On the good side, each payment is a mixture of principal and interest, so taxes are levied on a much smaller piece.
Investment Horizon
Before putting your money in an annuity, one of the primary considerations is your investment horizon, or the time toward your particular savings goal. A 20-year-old saving for retirement at 65 has much more time to play with possibly riskier investments or more secure investments with lower rates of return, since there will be a good 40 years or more to recoup losses and gain. Someone who is retired and has a need for liquid assets would better consider a CD or shorter-term products that can produce quick returns.
Viability
As mentioned above, the validity of the annuity contract rests with the first party investing money and the reliability and viability of the second party to be able to pay the stated amount after the annuity matures. Deferred fixed annuities are not insured by the U.S. government. Before purchasing an annuity, one should determine the company's financial strength by researching independent rating companies such as Moody's, A.M. Best, Standard & Poor's and Fitch. If the company no longer exists in the 10, 20 or 30 years when the annuity matures, it may be difficult or even impossible to recover your loss.
