Many people wonder about the flexibility of an annuity and the difficulty of getting money out. While annuities are long-term investments, you don’t need to fear that you have frozen your money for years. There are ways to withdraw funds from an annuity, and some are even penalty free.
Annuities range in term from three to nine years, with most annuities lasting five to seven years. This is a long time to lock in your money. But just because your money is in the annuity doesn’t mean you don’t have access to it. Fixed annuities usually offer a principal guarantee. This means that you can take all of the money out for any reason and only be at risk of losing the interest. If you have been taking the interest out as income, the interest amount will be deducted from the principal and the rest returned to you. Variable annuities are a bit trickier since the principal will fluctuate and you are investing in a non-guaranteed mutual fund.
Annual Penalty-Free Withdrawals
You may be familiar with how a time certificate works: money is placed in for a term with a guaranteed rate of return that you can leave in the account or withdrawn from regularly. The same principal works with annuities. The difference is annuities often allow you to take more than the principal, in most cases without penalty. Expect to be able to pull between 10 to 15 percent of your annuity value out annually without penalty. You can do this monthly, quarterly or at the end of the year. The reason annuities do this is because it's a longer investment than most, and people cannot foresee certain expenses such as car or home repair. While many people will use a smaller amount as income, having the extra liquidity is a major bonus in annuities.
If you need to pull out more than the penalty-free amount, you will be assessed a surrender charge if you are still in the term period of the annuity. For example, if you have a seven-year annuity allowing 10 percent annual withdrawals, your surrender charges may be a sliding annual scale something like this: 7 percent down to 1 percent. What this means is that if you take out more than the 10 percent in the first year you will be assessed a 7 percent penalty on the remainder of the money. In the last year of the term that drops to 1 percent, or $1 for every $100 you need to pull out. After the term, you can pull it all out without penalty. Check your contract for surrender charges and how they apply to your annuity. Just remember that any money your annuity earns is growing tax-deferred so you will get a tax bill for money over your principal.