The time it takes to cash out an annuity depends on the type of annuity it is, the withdrawal method and the company processing the request. Lump-sum withdrawals may take a few days to several weeks, depending on administrative requirements and potential surrender charges, whereas structured payouts follow a predetermined schedule and cannot be expedited. Some annuities include a surrender period, which can delay access to funds or result in penalties for early withdrawals. Additionally, in the case of selling payments to a third party, court approval may extend the timeline for cashing out an annuity to several months.
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Cashing Out an Annuity
Cashing out an annuity refers to withdrawing funds from the contract before or instead of receiving scheduled payments. This can be done in different ways, depending on the annuity’s structure and terms, including:
- A full cash-out means surrendering the contract and taking a lump sum, often triggering taxes and potential surrender charges.
- A partial withdrawal allows access to only a portion of the funds while keeping the annuity active. Some annuities offer penalty-free withdrawals up to a certain limit each year.
- Alternatively, selling future payments to a third-party company provides immediate cash but at a discount.
Each method impacts long-term financial planning, taxation and potential penalties, making it useful to assess the annuity’s terms before proceeding.
Factors That Affect How Long It Takes to Cash Out an Annuity
The time required to cash out an annuity typically ranges from a few weeks to several months, depending on the annuity type, provider policies, withdrawal method and other factors. Ultimately, it’s important to review contract details and provider policies before initiating a cash-out. Here are five factors to keep in mind.
Different annuities have distinct withdrawal rules that affect how long it takes to cash out. Fixed and variable annuities may have contractual surrender periods that restrict withdrawals for a set number of years, while immediate annuities follow a structured payout schedule that typically cannot be altered. Indexed annuities may have market-value adjustments, which could delay access to funds depending on market conditions. Annuities with lifetime income riders may limit lump-sum withdrawals, requiring a conversion process that extends the timeline.
Surrender Period and Charges
Most annuities include a surrender period, typically lasting six to eight years. During this time, withdrawing funds can result in surrender charges, which may decrease over time. If a full cash-out occurs within this period, processing could be delayed while the insurance company calculates the penalties and final payout amount. Annuities that have exceeded the surrender period generally allow faster access to funds.
Surrender charges are usually structured on a declining scale, meaning they decrease the longer the annuity is held. For example, an annuity with a seven-year surrender period may impose a 7% fee on withdrawals in the first year, decreasing by 1% each year until the charge disappears. If a contract holder withdraws funds in the third year, they might face a 5% penalty on the withdrawn amount. This means that while access to funds is technically available, cashing out too soon can result in significant financial losses.
Processing Time By the Annuity Provider
Insurance companies and financial institutions have their own processing timelines. Some providers process lump-sum withdrawals fairly quickly, while others may take a number of weeks, particularly for full surrenders that require additional paperwork. If the annuity involves multiple investments, such as in a variable annuity with sub-accounts, liquidating assets may take longer depending on market conditions and fund processing schedules.
Method of Withdrawal
The method used to withdraw funds also affects timing. Electronic funds transfers (EFTs) typically process faster than paper checks, which may take longer to print and mail. If the withdrawal requires notarized documents or additional approvals, such as for annuities held within trusts, the process can be further delayed. Some annuity providers also have mandatory waiting periods before releasing large withdrawals.
Selling Annuity Payments
If selling annuity payments to a third party, the process generally takes longer. Court approval is often required for structured settlement annuities, adding weeks or months to the timeline. Additionally, third-party buyers may conduct a due diligence review, which includes verifying the contract terms and confirming legal compliance before completing the transaction.
How Are Annuity Withdrawals Taxed?
Annuity withdrawals are taxed based on the contract type and the source of the funds. If the annuity was purchased with pre-tax dollars, such as within a traditional IRA or 401(k), all withdrawals are taxed as ordinary income. For annuities funded with after-tax dollars, only the earnings portion of withdrawals is taxable, while the principal is returned tax-free.
The IRS uses the last-in, first-out (LIFO) rule for non-qualified annuities, meaning that earnings are withdrawn before the principal, resulting in higher initial tax liabilities. If an annuity holder cashes out before age 59 ½, a 10% early withdrawal penalty may apply on top of regular income taxes. Annuity holders who choose to annuitize their contract receive payments that are taxed based on an exclusion ratio, which determines the taxable and non-taxable portions. So, once annuitized, each payment from a non-qualified annuity is typically a combination of taxable interest and tax-free return of principle.
Bottom Line
Accessing funds from an annuity can be a straightforward process or involve several steps, depending on the contract terms, withdrawal method and any applicable restrictions. While some withdrawals are processed quickly, others may take longer due to surrender charges, provider policies or legal requirements. Tax treatment also varies, affecting the overall financial impact of cashing out.
Retirement Planning Tips
- A financial advisor can help you create a plan to reach different retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset’s RMD calculator to see how much your required minimum distributions will be.
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