At 68 She’ll Want Her $200,000 Back From the Annuity She Bought at 63. The Surrender Charge Will Still Bite, and the Free-Withdrawal Clause She Skipped Over Is How She Gets Out Cheaper
She bought a deferred annuity at 63, and now at 68 she wants her $200,000 back, but the surrender schedule says she owes thousands. Two pages buried in her contract could change what she actually pays.
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For one woman, taking out the $200,000 she put into a deferred annuity at 63 and withdrawing it at 68 triggers a surrender charge, a term many buyers haven’t heard since signing. Retirees often end up here. They buy an annuity, leave it alone for a few years, and then decide they’d rather have the cash back.
A deferred annuity is a contract with an insurance company. The money grows tax-deferred until you withdraw it or convert it to income. The catch is the surrender charge, a fee for withdrawing money during the first several years. It usually decreases each year until it reaches zero, and the contract lists the exact schedule. Surrender periods generally range from eight to 10 years, and charges often start at 8% in the first year and decline each year after that, according to a 2023 SmartAsset article.
Other retirees run into the same question. A caller on Suze Orman’s podcast asked whether to surrender her variable annuity right away or wait until year nine, when the surrender fee drops to zero. Meanwhile, she was paying $380 per quarter in fees.
What Walking Away at 68 Actually Costs
For example, say her contract is still worth about $200,000. Her schedule starts at 8%, drops one point a year, and hits zero after year eight. At 68, she’s in year six, so the charge is 3%. If she cashes out everything, she pays $6,000.
A Free-Withdrawal Clause Changes the Math
Many contracts let the owner take out part of the money each year with no surrender charge. That allowance is typically 5% or 10% of the contract value. Some contracts figure it on the original premium, some on the current value, and some won’t let you combine it with a full surrender in the same year. The exact percentage and rules are in her own contract.
Assume a 10% free amount based on current value, with no growth:
| Approach | Surrender Charge |
|---|---|
| Cash out everything at 68 | $6,000 |
| Take $20,000 free at 68, surrender the rest the same year | $5,400 |
| Take $20,000 free at 68, surrender the rest at 69 at 2% | $3,600 |
| Take the free amount every year until the schedule ends | $0 |
On that last path, she takes $20,000 at 68, $18,000 at 69, and $16,200 at 70 without penalty. Once she turns 71, the 8-year surrender schedule expires, and she can withdraw the remaining $145,800 with zero surrender charges.
For most people in her spot, either the annual free-withdrawal path or the one-year wait carries a smaller surrender charge than cashing out today. The only real cost of waiting is what the money earns in the meantime. The 10-year Treasury yields around 5%, and the national average 12-month CD pays 1.8%. If her contract credits far less than she could earn elsewhere, leaving early becomes more attractive.
Other Exits That Skip the Full Charge
- Hardship waivers. Some contracts, but not many, waive the charge for disability, nursing home stays, or terminal illness.
- A 1035 exchange. Federal law says no gain or loss is recognized when one annuity contract is switched for another (26 U.S.C. § 1035(a)(3)). The new contract may have a new surrender schedule, though.
- Required withdrawals inside an IRA. If the annuity sits 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’s a contract term to confirm, and at 68 she isn’t there yet.
How Withdrawals Get Taxed
If the annuity was bought with after-tax money, any withdrawal made before annuity payments start is taxed to the extent allocable to income on the contract (26 U.S.C. § 72(e)(2)(B)). Growth comes out first, and the taxable portion of a distribution is treated as ordinary income. Her original principal comes back tax-free once the gains are gone. Withdrawals from an IRA are included in income in the manner provided 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 doesn’t apply to withdrawals made on or after the date on which the taxpayer attains age 59½, so it doesn’t touch her. Spreading withdrawals out helps in another way, too. A large gain in a single year can push an individual’s income over $109,000, triggering higher Medicare premiums. Some fixed annuities also apply a market value adjustment, which adjusts withdrawn funds based on a formula in the contract.
Two Contract Pages That Decide Her Cost
The first page is the surrender schedule. It shows what year she’s in and what the charge drops to next year. The second is the free-withdrawal provision. It shows the percentage, whether it’s based on premium or current value, and whether it can be used in the same year as a full surrender. The common mistake is cashing out everything in the same week she calls, before she’s read either one.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
