Annuity Surrender Charges and How to Get Out of an Annuity
By Hans Goldstein, EA, founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.
How a surrender schedule works
The schedule is printed in the contract. A typical 7-year schedule might charge 7% in year one, 6% in year two, and so on down to 0% in year eight. The charge applies only to the amount above the free withdrawal allowance. Some contracts also waive charges for nursing home confinement, terminal illness or death.
Market value adjustments
Many fixed and fixed indexed annuities add a market value adjustment (MVA) on early withdrawals. If interest rates have risen since you bought, the adjustment reduces what you get; if rates have fallen, it can add to it. The MVA usually ends when the surrender period does.
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Taxes when you cash out
- The gain is taxable as ordinary income when you surrender. For a non-qualified annuity, gains come out first. See how annuities are taxed.
- Before 59½, the taxable part generally owes an extra 10% federal tax.
- Cashing out a large contract in one year can push you into a higher bracket and over an IRMAA line. Spreading it over two or more tax years can lower the total.
- If you surrender for less than your investment in a non-qualified contract, the loss is generally not deductible under current law, because miscellaneous itemized deductions are suspended (IRS Publication 575, 2025). Ask a tax professional.
Ways to get out of an annuity
- Free-look period. If the contract was just delivered, you can cancel for a refund, usually within 10 to 30 days (30 days in California for buyers 60 and older, California Insurance Code section 10127.10).
- Use the free withdrawals each year until the surrender period ends.
- Wait out the schedule. Check the date the surrender charge reaches zero.
- 1035 exchange to another annuity, which avoids tax but not the old contract's surrender charge, and usually starts a new one.
- Surrender and accept the charge and the tax, if keeping the contract costs more.
Common questions
Can you cash out an annuity?
Yes. You can surrender a deferred annuity at any time, but you may pay a surrender charge during the surrender period, income tax on the gain, and a 10% extra tax if you are under 59 1/2.
How long is an annuity surrender period?
Commonly 5 to 10 years, set by the contract. Multi-year guaranteed annuities often match the surrender period to the rate guarantee term.
Can you lose money by surrendering an annuity?
Yes, in the early years. Surrender charges and a negative market value adjustment can leave you with less than you put in.
Sources (checked October 10, 2026): IRS Publication 575, 2025; IRS Topic 410 (10% additional tax before 59½); Internal Revenue Code section 1035.
Related
- The annuity free-look period: how to cancel for a refund
- What a market value adjustment does to an early withdrawal
- The Fine Print: red flags and questions to ask before you sign
- 1035 exchange rules
- How annuities are taxed
- How annuities work
- Annuity commissions research
- All annuity education pages
More on annuities: How Do Annuities Work? A Plain-English Guide · How Are Annuities Taxed? · Inherited Annuity Taxes · 1035 Exchange · Annuities in an IRA · Types of Annuities and Their Pros and Cons · What Is a MYGA? Multi-Year Guaranteed Annuities Explained · Fixed Index Annuity Explained · Immediate Annuity (SPIA) Explained · Variable Annuity Explained · Annuity vs CD
Education only; nothing is sold here and no product is recommended. The Foundation's work is independent of any outside professional activity. RLF sells nothing and accepts no funding from financial companies. Tax rules depend on your situation; check with a tax professional before acting.
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Hans Goldstein, EA
Founder & Executive Director · Retirement Literacy Foundation, a 501(c)(3) non-profit
Admitted to practice before the IRS
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