Last updated: March 2026 | By Elizabeth Prescott
How to Get Out of an Annuity: Your Options and What They Cost
Getting out of an annuity is possible – but it is rarely free. Before you make a move, you need to understand exactly what each exit path will cost you in surrender charges, taxes, and lost benefits.
Four main options exist: cancel during the free-look period, take systematic withdrawals, do a full surrender, or move the money through a 1035 exchange. Which path makes sense depends entirely on how long you have owned the annuity, what type it is, and what you plan to do with the money afterward.
This guide walks through each option honestly – including the real dollar costs – so you can make an informed decision rather than a reactive one.
Can You Get Out of an Annuity?
Yes, you can exit an annuity – but the cost varies enormously depending on when you try to leave. An annuity you bought last week costs nothing to cancel. An annuity you bought three years ago may cost you 5-7% of your contract value just to walk away.
There are four realistic paths out of an annuity. Each one has a different cost profile, timeline, and tax impact. Understanding all four before acting could save you thousands of dollars.
Option 1: Use the Free-Look Period (No Cost)
The free-look period is the only completely cost-free exit from an annuity. If you bought your annuity recently and are still within this window, you can cancel it and receive a full refund of your premium – no questions asked.
Every state requires a minimum free-look period. Most set it at 10 days from the date you receive the contract. Many states require 20 to 30 days for buyers age 65 and older, specifically to protect seniors from high-pressure sales situations.
If you are in this window right now, act immediately. Call your carrier, tell them you want to exercise your free-look cancellation right, and request the return of your premium. Get the confirmation in writing.
For a full breakdown of how this works by state, see our guide on the Annuity Free-Look Period.
Option 2: Take Systematic Withdrawals (Low to No Cost)
Most fixed, MYGA, and fixed index annuities allow you to withdraw up to 10% of your contract value each year without triggering a surrender charge. This is called the free-withdrawal provision, and it is one of the most underused tools annuity owners have.
On a $200,000 annuity, that is $20,000 per year you can pull out penalty-free. Over five years, that is $100,000 back in your pocket without a single dollar in surrender charges.
The downside is time. Fully exiting a $200,000 contract at 10% per year takes roughly 10 years. And every dollar you withdraw that represents a gain is taxed as ordinary income in the year you take it – there is no capital gains treatment on annuity withdrawals.
This approach makes the most sense if you are not in a hurry and want to avoid the hit of a full surrender. It also works well as a bridge strategy: take the 10% free withdrawal annually while you wait for the surrender period to end, then surrender the rest with no charge.
Learn more about how withdrawals are structured in our guide to Annuity Withdrawal Rules.
Option 3: Surrender the Annuity (Costly in Early Years)
A full surrender means cashing out your entire annuity contract at once. You get the current contract value minus the surrender charge, minus applicable taxes.
Surrender charges are front-loaded and decline over time. A typical schedule on a 7-year MYGA looks like this:
| Year | Surrender Charge |
|---|---|
| 1 | 7% |
| 2 | 6% |
| 3 | 5% |
| 4 | 4% |
| 5 | 3% |
| 6 | 2% |
| 7 | 1% |
| 8+ | 0% |
Here is a real example of what that looks like in practice. James, age 64, purchased a $300,000 fixed annuity three years ago. His contract has a 7-year surrender schedule. He is now in year 3, meaning his surrender charge is 5%. If he surrenders today, he pays $15,000 in surrender charges before a single tax dollar is calculated.
On top of the surrender charge, he owes ordinary income tax on all gains above his cost basis. If his annuity has grown to $330,000, the $30,000 gain is fully taxable. At a 22% federal rate, that is another $6,600 owed to the IRS – on top of the $15,000 surrender charge. His total exit cost: roughly $21,600.
If James were under age 59.5, he would also owe a 10% IRS early withdrawal penalty on the gains – adding another $3,000 to the bill.
This is not meant to scare you away from surrendering. Sometimes the math still favors leaving. But you need to know the full number before you decide. Our detailed breakdown of Annuity Surrender Charges Explained covers how to calculate your exact cost.
Option 4: Do a 1035 Exchange (Move Without Surrendering)
A 1035 exchange lets you transfer the value of one annuity directly into a new annuity contract without triggering income tax on the gains. The IRS treats it as a continuation of your original investment rather than a taxable distribution.
This is a powerful tool when you want to escape a poorly performing annuity or one with high fees, but you are not looking to cash out entirely. You preserve the tax-deferred status of your money and restart with a better product.
There is one important catch: a 1035 exchange does not waive surrender charges from your current carrier. If you are inside a surrender period, you still pay the charge when the funds leave. The exchange only avoids the income tax hit – not the contractual penalty from the insurance company.
Where a 1035 exchange makes the most strategic sense is when you are near the end of your surrender period. Wait until the charge drops to 1% or 0%, then exchange into the new contract. You move your money, owe no taxes, and start fresh with better terms.
For a step-by-step walkthrough, see our guide on How to Do a 1035 Exchange.
What About Variable Annuities?
Variable annuities have all the same exit costs as fixed annuities – surrender charges, taxes, potential early withdrawal penalties – but they add two complications that can make exiting even more expensive.
First, your account value is tied to sub-accounts that move with the market. If you bought a variable annuity and the market has dropped since then, your contract value may be significantly lower than what you put in. Surrendering now means you lock in those losses.
Second, many variable annuities include living benefit riders – guaranteed lifetime withdrawal benefits (GLWBs) or guaranteed minimum income benefits (GMIBs) that can be extremely valuable. These riders often accumulate at a guaranteed rate (sometimes 6-8% annually) regardless of market performance. Surrendering the annuity forfeits that accumulated benefit value permanently.
Before you surrender a variable annuity, have an advisor calculate what your rider benefit is worth versus what the contract is worth in surrender value. In some cases, the rider benefit far exceeds the market value and is worth holding for the long term. Read our full breakdown of What Is a Variable Annuity to understand how these features work.
What Taxes Will You Owe When You Surrender?
The IRS taxes annuity withdrawals and surrenders under the last-in, first-out (LIFO) rule – meaning your gains come out first and are fully taxable before you touch your original principal.
How much you owe depends on three things: your age, whether the annuity is qualified or non-qualified, and how large your gains are.
Non-qualified annuity (funded with after-tax money), age 59.5 or older: You owe ordinary income tax only on the gains – not on your original premium. If you paid $200,000 and the contract is worth $240,000, you owe income tax on $40,000.
Qualified annuity (held inside an IRA, 403(b), or other pre-tax account): The entire distribution is taxable as ordinary income – not just the gains – because your original contributions were pre-tax. A $240,000 surrender from a qualified annuity means $240,000 of taxable income in one year. That can push you into a significantly higher tax bracket.
Any annuity, under age 59.5: Add a 10% IRS early withdrawal penalty on top of ordinary income tax. This applies to the taxable portion of the distribution. The penalty and the income tax are separate charges – both apply simultaneously.
For complete guidance on how annuity distributions are taxed in every scenario, see How Are Annuities Taxed.
When Does It Make Sense to Surrender?
Sometimes surrendering is the right move. The question is whether you have done the full math before pulling the trigger.
Start with a break-even calculation. Add up the total cost to exit – surrender charge plus estimated tax bill. Then calculate what you gain by leaving – whether that is a better interest rate, lower fees, or simply freeing up capital for something you need. If the gain over the next 3-5 years exceeds the exit cost, the math may support leaving.
Situations where surrendering often makes sense:
- You have a genuine financial emergency and need the capital now
- The annuity was mis-sold and does not match your actual financial situation
- You are outside or nearly outside the surrender period and a significantly better product is available
- The carrier’s financial strength has deteriorated and you have concerns about long-term safety
Situations where surrendering usually does not make sense:
- You are within 1-2 years of the surrender period ending – wait it out
- You can meet your cash needs through the 10% free-withdrawal provision
- You are reacting to short-term market anxiety rather than a real change in your financial plan
- You hold a variable annuity with a valuable living benefit rider that would be lost upon surrender
For a balanced look at when annuities work well and when they do not, see our honest assessment of Annuity Pros and Cons.
How to Start the Surrender Process
If you have done the math and decided to move forward, here is the process most carriers follow.
Step 1: Call your carrier and request a surrender quote. Ask for the current cash surrender value (the amount you would actually receive after surrender charges are deducted). This is not the same as your account value or accumulated value.
Step 2: Request the surrender charge schedule in writing. Confirm what percentage applies today and how it changes over the next 12-24 months. Sometimes waiting just one contract anniversary date saves you a full percentage point.
Step 3: Consult a fee-only financial advisor before signing anything. A fee-only advisor charges you directly and has no incentive to recommend a particular annuity product. If you are surrendering more than $50,000, paying $300-500 for an independent second opinion is usually worth it. Make sure you fully understand what you plan to do with the proceeds – buying a new annuity immediately through a commission-based agent after surrendering one should raise questions.
Step 4: Complete the surrender paperwork. Your carrier will send you a surrender request form. Allow 5-15 business days for processing after the signed paperwork is received. Funds are typically sent by check or ACH transfer.
If you want to buy a different annuity with the proceeds, tell your carrier upfront whether you intend a 1035 exchange or a direct surrender. The paperwork and process differ – and getting it wrong can trigger an unnecessary tax event.
If you are still deciding whether an annuity is right for your situation at all, our guide on How to Buy an Annuity walks through what to look for and what to avoid before you commit.
Frequently Asked Questions
How long does it take to get out of an annuity?
Most carriers process a full surrender in 5 to 15 business days after receiving your completed surrender request paperwork. If you are doing a 1035 exchange into a new annuity, the process takes longer – typically 2 to 6 weeks – because both carriers need to coordinate the transfer. Free-look cancellations are usually processed faster, within 5-10 business days.
Can I get out of an annuity without penalty?
Yes, in two scenarios. If you are still within your free-look period (usually 10-30 days from contract delivery), you can cancel with a full premium refund and no charges. Once past that window, the 10% free-withdrawal provision most contracts include lets you pull out up to 10% of your contract value each year with no surrender charge – though income tax still applies to any gains withdrawn.
What happens to my annuity if I die before surrendering?
Most annuity contracts include a death benefit that passes the contract value – or at minimum your original premium – to your named beneficiary. Surrender charges do not apply when a death benefit is paid. The beneficiary typically receives the proceeds as a lump sum and owes income tax on any gains above the original cost basis. Some contracts offer enhanced death benefits that lock in a higher amount.
Is it better to surrender or do a 1035 exchange?
If you plan to put the money into another annuity, a 1035 exchange is almost always better because it avoids triggering income tax on your accumulated gains. If you need the cash for another purpose entirely – paying off debt, covering an emergency, investing in something else – then a full surrender is your only option. The surrender charge cost is the same either way if you are inside the surrender period.
Can I get out of an annuity I bought inside an IRA?
Yes, but the tax treatment is different. Because IRA contributions are pre-tax, a distribution from a qualified annuity inside an IRA is fully taxable as ordinary income – not just the gains. The full amount you receive counts as income in that tax year. If you are under 59.5, the 10% early withdrawal penalty also applies to the full distribution unless an IRS exception covers your situation. One option is to roll the annuity value into a different IRA-held annuity or an IRA at a brokerage, which avoids the tax hit while still getting you out of the current contract.
