Many people consider selling their annuity payments for a lump sum of money. Little do they know about the consequences of their decisions. No matter what kind of annuity one may have, he or she must be very careful about taking an action in this matter. By cashing out an annuity, one will have to cope with financial losses in a form of charges, fees and taxes.
Selling your annuity early may result in:
- Paying surrender charges – depending on the maturity of your contract and the type of the product you acquired, your charges may be as high as 7 percent. Usually each consecutive year will make the charge smaller. Therefore signing off your newly purchased annuity will give you the greatest loss.
- If you are under the age of 59½ a 10 percent penalty on the taxable portion of your annuity will be forfeited to the Internal Revenue Service (IRS).
- And yet unpleasant news is that it will be treated as regular income. So be ready to pay taxes as you would on any ordinary income.
There may be a great number of reasons for one to go ahead sell his or her annuity. Perhaps one bought something that he really did not fully understand and therefore expected more from it than it really does for him or her. In such case one should try to learn more about the product he or she has acquired and try to tune it up by changing the fund allocation. Variable annuities grow with the gains in a number of investment sub-accounts. Following the trends of the market and making adequate adjustments may help to improve the growth rate of the annuity. If this seems like your problem, consider consulting with the insurer. Perhaps you will be able to fix the situation for the better and enjoy your annuity instead of treating it as a burden.
If the situation requires you to come out of your current annuity contract, you may try to cut down your losses by turning to the section 1035 of the tax code that allows for the tax-free transfers between similar accounts. In this case you will not be selling your annuity, however your losses will diminish considerably. If you are under the pension age, consider a change of your variable annuity for an immediate annuity. By doing so, you will omit a number of charges since you are still keeping your annuity, but of a different type.
Do not forget to look into the contract you have with the insurance company. Check the waiver clause. It may state penalty-free withdrawals in case of terminal illness, disability and other harsh circumstances. Some insurers might grant you a withdrawal of up to 15% without any charges. Always talk to the insuring company first. They may even give you a great quote for your annuity.
Before settling on a decision concerning your annuity, take your time to learn more about your options and get a consultation from your lawyer or accountant. Visit websites dedicated to the subject. Google out and read some books about personal investments and finance. If you are in need of a small amount of money comparing to the value of your annuity, consider selling a part of your future payments instead of the whole thing. Try to look for other options in overcoming your temporary financial problems.
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