Are you unhappy with a tax-deferred annuity that you purchased outside of a retirement plan? As long as you’re at least age 59-1/2, you can pull out your cash without paying a 10% penalty tax.
If you’re younger than 59-1/2, you might be able to make lemonade from a lemon of an annuity. Say you bought a variable annuity a few years ago and your profits have disappeared with the bear market. You won’t owe any income tax if you cash in the contract, and no income tax mean no 10% penalty tax, regardless of your age.
When you cash in an annuity, though, you may owe surrender charges—up to 7% in the first seven years. If so, you can “annuitize” the contract–arrange for the contract value to be paid out in monthly installments–to avoid the surrender charges. You can ask for the annuity to be paid to you over the shortest time possible, which might be five years. You’ll get your cash back, free of surrender charges. If you have no gain in the contract, taxes and penalties won’t be due. Once you have cash in your pocket, you can spend it or reinvest it, at your discretion.