Annuities are designed to be a long-term investment, but sometimes circumstances change, requiring you to regain access to your principal. It’s possible to cash out early, but there are a few caveats to consider first. 

Read on as we cover how to get out of an annuity contract and the possible tax and fee implications.

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Can you get out of an annuity?

Yes, you can get out of an annuity contract at any time. But before you do, it’s important to understand the potential fees, taxes, and alternatives to cashing in. 

For instance, you may be subject to a surrender charge, which is an early withdrawal fee. These charges typically start at about 7–10% of your account value and gradually decline until they reach zero. 

And if you’re under age 59½, you might face a 10% IRS penalty on the taxable portion of the withdrawal. There are exceptions, but these are limited and require meeting specific qualifications.

Providers differ on these regulations, so check your contract to learn which apply.

6 ways to get out of an annuity

Below, we’ll outline six ways to close an annuity account and regain access to your funds.

1. Free look period

First things first, check to see if you’re eligible for a free look period withdrawal. During this short window, you can cancel your annuity without incurring any surrender charges. Depending on state regulations and insurance provider policy, this period lasts around 10–30 days after signing the contract. An annuity cashout during a free look period usually isn't subject to taxes. 

Generally, insurers will fully refund your original premium, even if the market dips and reduces the account's value during the free look period. But some states only require providers to repay the contract at the current market value. 

If it’s still the early days of your annuity plan and you’ve changed your mind, check in with your insurance provider — they likely provide a free look period. For instance, at Gainbridge^®, all of our annuity plans come with a risk-free 30-day cancellation policy.

2. Return of premium rider

Another thing to consider is whether your annuity has a return of premium rider. This optional addition to your contract lets you get your principal back if you decide to cancel your annuity early.

Not all insurance providers offer this rider, and if you’re unsure whether it’s included in your contract, check with your insurance provider. 

3. Partial withdrawals

Most annuities allow you to withdraw a portion of your account without incurring surrender charges. Typically, you can take out 10% of your contract value per year. So if you have a $100,000 annuity, you could potentially withdraw up to $10,000 annually without penalties. 

There are tax implications, however, depending on the type of annuity you have:

• Qualified plans are funded with pre-tax dollars, so withdrawals are subject to ordinary income tax.
• Non-qualified plans are purchased with after-tax dollars, so you only owe income tax on the gains portion of your withdrawal — your original contribution usually comes out tax free. But you’ll need to track your cost basis accurately to determine which part of the withdrawal is taxable.

Cashing out of an annuity through partial withdrawals may be a sound option if you need some liquidity while still preserving the bulk of your annuity’s value. But you should approach with caution to ensure you stay on track with your savings goals and avoid unnecessary fees.

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4. Paying the surrender charge

Paying the surrender charge is often the most straightforward and costly way to get out of an annuity. 

The fee that you’ll owe depends on:

• Your contract’s surrender schedule, which often starts around 7–10% in the first year and gradually decreases over time
• How soon you withdraw relative to your policy start date
• Whether your contract includes any waivers (e.g., terminal illness or nursing home waivers) that reduce or eliminate the surrender charge

Opting for a full annuity withdrawal can be beneficial if you’re nearing the end of your contract’s surrender period. It may also be necessary if you unexpectedly need immediate access to your funds.

5. 1035 exchange

A 1035 exchange is an IRS-approved method that moves funds from one annuity to another without incurring immediate taxes on your gains. In other words, it’s a like-kind exchange that rolls your existing annuity into a new contract with more favorable terms.

Keep in mind:

• Surrender charges may still apply: If your current annuity is within its surrender period, you might be on the hook for a fee even though the 1035 exchange itself is tax free.
• A new surrender schedule will likely begin: Once you start a new annuity contract, you may enter another surrender period with its own schedule.
• You may face new fees or reduced benefits: The new annuity could have different charges, rate caps, or riders from your old contract. If you rely on specific features, make sure you won’t lose them in the exchange.

This transfer can be a sound strategy if you’re dissatisfied with your current terms or performance but still want the benefits of an annuity.

6. Selling the income stream

Selling the income stream — often called factoring — involves transferring some or all of your future annuity payments to a third party in exchange for a lump sum.

For tax purposes, the IRS generally treats any lump-sum payment from your annuity as a distribution. As a result, you’ll owe ordinary income tax on the gains and, if it’s a qualified annuity, possibly on the principal as well.
Factoring is a good option for gaining immediate access to cash, but it’s made accessible by sacrificing a portion or all of your future income stream.

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FAQs

Who can surrender an annuity?

Anyone can surrender an annuity — use one of the above methods if you want immediate access to your funds.

How hard is it to get out of an annuity?

It depends on the type of annuity you hold, how long you’ve had it, and any applicable surrender charges or rider provisions. If you’re still within the free look period, it’s much simpler to cancel the contract. 

As a first step, understand the various cashing out methods above. Then, consider speaking with a financial advisor about your contract and financial goals. 

How long does it take to cash out an annuity?

In most cases, finalizing the transaction can take a few weeks to several months. This is particularly true if you need to submit detailed paperwork or if multiple authorizations are required. The timeline tends to be shorter for partial withdrawals — often just a week or two. 

How much does it cost to break an annuity?

The cost of breaking an annuity depends on personal and contractual factors. If you’re within the free look period, you can usually cancel the contract without paying any surrender fees. Once this period has closed, you’ll likely be subject to surrender charges if you want to break your annuity contract entirely. Additionally, IRS penalties and taxes may apply, depending on your circumstances.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.