Did your adviser tell you how great annuities are, and how they can guarantee a life time of income for you and your spouse? Yep, they tell everyone that. But the truth is, most people eventually want to learn how to get out of an annuity.
Ways to Get Out of an Annuity
After you’ve retired and decided your annuity isn’t as great as you thought it would be, there is a good chance you will ask these three questions:
- What’s an annuity? (It’s okay, most people don’t know.)
- Can I cancel it and get my money back to invest in something else?
- Are there any penalties if I cancel? If so, how do I get around them?
Most people who own an annuity with an IRA are seeking to use those retirement plan dollars in a new investment opportunity with the goal of increasing returns. However, getting rid of an annuity owned by your IRA isn’t as easy as selling a mutual fund or stock investment.
Let’s begin with the big questions here, the ones you already asked by being interested in this article. But first thing’s first. Let’s define annuities.
What is an Annuity?
The annuity you own is a contract with an insurance company. By signing this contract you agreed to either invest a lump sum or a series of payments with an insurance company.
In doing so, the insurance company agrees to pay a specific amount of money to you over your life. There are many variations of annuities. But the simple explanation is you give up money now to an insurance company and they promise to pay you money later. The longer you wait to get paid the more they will pay you later.
Can I Cancel My Annuity and Get My Money Back?
You can cancel your annuity, but you may be subject to a surrender penalty. Unfortunately there is usually no way around this penalty. Most annuities have a surrender penalty where you, the owner of the annuity, get penalized for requesting a return of the investment within a certain period of years of the initial investment.
This time period is known as the “surrender period”. The surrender penalty on a 10 year surrender time period is usually 10% and decreases by 1% each year thereafter until it goes to zero after 10 years.
For example, if you invested a lump sum of $150,000 into an annuity and one year later (in year 2) you wanted to get your entire $150,000 back, you would be subject to a 9% surrender penalty of $13,500.
You would get back $136,500, but would forfeit the rest. Some penalty schedules are worse than others and they all vary. The surrender schedule is in your annuity contract documents and can also be requested at any time from the company holding your annuity.
How Do I Avoid Paying Taxes When Cancelling My Annuity?
Once you cancel an annuity owned by your IRA, the funds need to stay within your IRA in order to avoid taxes and penalties from your friends at the IRS. You can request the annuity company to transfer the IRA annuity cash balance over to a new IRA custodian of your choosing. Most investors find self-directed IRA the best method for this.
Once you’ve taken these steps, you’re retirement plan funds will be in an IRA and available to invest in stock, cryptocurrency, (link to cryptocurrency article here, “internal” links improve SEO) real estate, mutual funds, bonds and all other investments available to IRA holders.
If you have any questions about your annuity, please don’t hesitate to ask me personally. You can reach out in the comments or contact me directly. I’d love to help! If you’re ready to get out of your annuity, learn more about your retirement planning options, or take your retirement investments to the next level, schedule your consultation today.