At 68, She Wants Her $200,000 Back From an Annuity Bought at 63. The Surrender Fee Still Hurts, but a Missed Free-Withdrawal Rule Could Reduce the Damage

She purchased a deferred annuity at 63 and now, at 68, wants her $200,000 back. The surrender schedule says she would owe thousands, but two pages in the contract could change the amount she actually has to pay.

For one woman, taking back the $200,000 she put into a deferred annuity at 63 now brings a surrender charge into play, a term many buyers do not think much about after signing. Retirees often find themselves in this position: they buy an annuity, leave it untouched for several years, and later decide they want the cash instead.

A deferred annuity is a contract with an insurance company. The money grows tax-deferred until it is withdrawn or converted into income. The tradeoff is the surrender charge, a fee for taking money out during the first several years. That fee typically falls each year until it reaches zero, and the contract spells out the schedule. Surrender periods often run eight to 10 years, with charges commonly starting at 8% in the first year and declining after that, according to a 2023 SmartAsset article.

Other retirees run into the same issue. One caller on Suze Orman’s podcast asked whether to give up her variable annuity immediately or wait until year nine, when the surrender fee would disappear. In the meantime, she was paying $380 every quarter in fees.

What Cashing Out at 68 Could Cost

Suppose the contract is still worth about $200,000. If the surrender schedule begins at 8%, drops by one percentage point each year, and reaches zero after year eight, then being in year six means a 3% charge. Cashing out the full balance would cost $6,000.

A Free-Withdrawal Provision Can Change the Calculation

Many contracts allow the owner to withdraw part of the money each year without a surrender charge. That amount is usually 5% or 10% of the contract value. Some contracts base it on the original premium, some on current value, and some do not allow it to be combined with a full surrender in the same year. The exact percentage and rules are found in the contract itself.

Assume a 10% free amount based on current value, with no growth:

Under that last approach, she would take $20,000 at 68, $18,000 at 69, and $16,200 at 70 without penalty. Once she turns 71, the eight-year surrender schedule ends, and she can withdraw the remaining $145,800 with no surrender charges.

For most people in her position, either the annual free-withdrawal option or waiting one more year would produce a smaller surrender charge than cashing out immediately. The main cost of waiting is the return the money could have earned elsewhere. The 10-year Treasury yield is around 5%, while the national average 12-month CD pays 1.8%. If the annuity credits much less than that, leaving early becomes more appealing.

Other Ways to Exit Without Paying the Full Charge

1. Hardship waivers. Some contracts, though not many, waive the charge for disability, nursing home stays, or terminal illness.
2. A 1035 exchange. Federal law says no gain or loss is recognized when one annuity contract is exchanged for another (26 U.S.C. § 1035(a)(3)). The new contract may still have a fresh surrender schedule.
3. Required withdrawals inside an IRA. If the annuity is held in a traditional IRA, required distributions generally begin at 73 under current SECURE 2.0 rules, rising to 75 for younger savers. Some contracts waive surrender charges for those amounts. That is a term to verify, and at 68 she is not there yet.

How the Withdrawals Are Taxed

If the annuity was funded with after-tax money, any withdrawal made before annuity payments begin is taxed to the extent it represents income on the contract (26 U.S.C. § 72(e)(2)(B)). Gains come out first, and the taxable portion of a distribution is treated as ordinary income. The original principal returns tax-free after the gains are used up. Withdrawals from an IRA are included in income under section 72. If the IRA was funded only with deductible contributions, all withdrawals are taxable.

An additional 10% tax also applies to the taxable portion of annuity withdrawals. It does not apply to withdrawals made on or after the date the taxpayer reaches 59½, so it does not affect her. Spreading withdrawals over time can also help in another way. A large gain in a single year can push income over $109,000, which can trigger higher Medicare premiums. Some fixed annuities also apply a market value adjustment, changing the amount withdrawn according to a formula in the contract.

Two Pages in the Contract Determine the Cost

The first is the surrender schedule, which shows what year she is in and how the charge changes the next year. The second is the free-withdrawal provision, which shows the percentage, whether it is based on premium or current value, and whether it can be used in the same year as a full surrender. The common mistake is to cash everything out as soon as she calls, before reading either page.