Annuity Withdrawals: Everything You Need to Know

Hi there, Stan The Annuity Man, America's annuity agent. Oh, yes, I'm so glad you asked! I am licensed in all 50 states, including that nice, beautiful one you're sitting in. Today, we're talking about annuity withdrawals and everything you need to know by going through specific annuity types. You buy the annuity, and obviously, if you buy it from us, you'll understand those withdrawals. We'll go over all those details for each specific product type, so you fully understand the liquidity provisions, which is, in essence, what we're talking about.

Understanding Annuity Withdrawals

Okay, so annuity withdrawals. The way I look at that is you're taking money out of an annuity. Now, there are two ways to do that. There's annuitization, which is like turning on the faucet, and the income starts coming out. These would be Immediate Annuities, SPIAs, Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs). These are irrevocable pension products that pay you as long as you're breathing. We can structure them in 40+ different ways, etc. That, to me, falls under the category of withdrawals.

However, when most people talk to us, my team and I, about withdrawals from annuities, they’re usually referring to Multi-Year Guarantee Annuities, which are the annuity industry's version of a CD, and Fixed Index Annuities, which are a fancier version of a CD. But they're still designed, as of 1995, to compete with CD returns.

Withdrawal Provisions and Liquidity

"What's my withdrawal provision, Stan? What's my liquidity provision? How can I get to the money without paying penalties?" You have to understand that when you buy, say, a three-year MYGA, a five-year MYGA, a seven-year Index Annuity, or a 10-year Index Annuity, there are specific years of surrender charges if you decide to take out all your money before the end of the surrender period. For instance, if you have a seven or 10-year Index Annuity, and you take it out in year five, you're going to have to pay a surrender penalty if you withdraw all the money.

But most Index Annuities, let's talk about those first, have what's called a liquidity provision. Typically, it's around 10%. A lot of them are 10% annually of the total accumulation value. It's really that simple.

Example of Liquidity Provisions

If you put in $100,000 and it grew to $120,000 and want to take out income, you could withdraw 10% of that $120,000 without penalty. If you want to take out more, the first 10% will be penalty-free, and whatever you take after that, surrender charges will apply. Most of the time, it’s 10% with Index Annuities. A lot of times, it’s 5%. With Multi-Year Guarantee Annuities, it’s not that static of a rule. It just depends on the MYGA you’re looking at. I encourage you to visit my site and see the best-fixed rates in the country. We have a live MYGA feed that lets you input your state and duration, and you’ll see all the companies and their yield to surrender. But in those middle columns, you’ll also see the liquidity provisions.

Liquidity and Interest Withdrawals

Can you take out interest only (listed as INT on our grid), or can you take out 5% every year or 10% yearly? When you schedule a call with us, go to our main page and click “Book a call.” We’ll ask you if you need liquidity or want to plan for that worst-case scenario where you might need to pull money out. Even if you don’t think you will, we’ll pair you up with the highest contractual guarantee that meets those needs and goals with deferred annuities.

Tax Implications on Withdrawals

Also, remember, when you withdraw money from a policy, you're going to pay taxes on gains first. This is known as Last In, First Out (LIFO) in the accounting world. You're going to pay gains first at ordinary income tax levels. Obviously, consult your CPA and tax lawyer for specific details. But understand this: you decrease the total when withdrawing from an annuity. Don’t let anyone tell you that "the gains will offset the withdrawals"—that’s just a sales pitch. If you're withdrawing money, you're taking it out of the principal.

Example of Decreasing Total with Withdrawals

Let’s say that at the time of this blog, you purchased a five-year MYGA, which is the annuity industry’s version of a CD, with a guaranteed interest rate of 4.5%. If the annuity company allows you to take out 10% penalty-free every year, but you say, “I only want to take out 4.5%. I don’t want to touch the principal,” that’s fine, and the principal remains intact. But if you take out more than 4.5%, it will decrease the total. You have to be very clear about your goals, and we will structure everything to match those goals.

Dealing with IRAs and Pre-59.5 Withdrawals

In the last example, I mentioned the 4.5% MYGA for five years, assuming it’s using non-qualified, non-IRA money. Let’s talk about if you had that same MYGA in an IRA. Any money coming out of an IRA is 100% taxable because it has been deferring taxes. Understand this: if you're under 59.5 years old and you take money out of an annuity, whether it's in a regular IRA or a non-IRA account (unless it's a Roth IRA), you’ll face an IRS penalty for withdrawals before age 59.5. There are a couple of rules around that, like 72(t), but I don’t want to go down that rabbit hole.

Planning Withdrawals Before 59.5

Unless it's an emergency, you shouldn’t plan on taking money out of an annuity before 59.5, because you don't want to incur those 10% penalties from the IRS. There’s no wiggle room with that. When you book a call with us, we'll talk to you, especially if you're younger, like 50 or 52. If you're under 50, we might not sell you an annuity unless there's something we don’t know. But we’ll make sure you understand the rules to maximize your contractual guarantees and avoid penalties.

The Importance of Proper Annuity Planning

We've been doing this for a long time, and we can certainly help you if withdrawing money from an annuity is part of your plan or if it's just an emergency part of the plan. If you want it to be part of your plan, let us know, and we'll recommend the best annuities that meet your withdrawal goals while ensuring the highest-rated contractual guarantees.

How to Contact Us

Hey, do me a favor. If you want to contact us, schedule a call with one of my team members. There's a chance that I’ll personally get that call. I do a lot of traveling and talking, but when I’m in the office, I tell my CEO, "Put me in the pool. I want to talk to people." I love talking to people—been doing it my whole life. So, you might get me. It could be fun, or scary, one of the two.

Get our books and run numbers on our calculators. It's free, no obligation, and no one will bother you. Don’t be afraid to contact us, and I'll see you on the next Stan The Annuity Man blog.