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How Do I Get Out of an Annuity Contract?
An annuity is a type of contract between you and an insurance or investment company. These investments offer a number of benefits like a relatively high rate of return, stable gains, and tax-deferred growth. The reason why annuities can offer these benefits is because they are a long-term commitment between you and your annuity company. This makes it rather difficult to get out of a contract if you ever change your mind.
Reasons to Get Out
There are several reasons why it might make sense to end your annuity contract. First of all, an annuity locks up a large amount of your money. If a financial emergency comes up, like medical bills or damage to your home, you might need to cash out your money faster than your annuity payment schedule. You could also decide that it would be better to invest your money somewhere else. If you want to invest in another asset like stocks, bonds, or real estate, you’ll need to cash out your annuity savings. It might also make sense to switch to another annuity contract. If interest rates go up, it is likely that you would find a better deal than your current annuity.
While it might make sense to cancel an annuity, it is not always easy. Once you start receiving payments, some companies do not let you end the contract. You have to just accept the future payment schedule.
Even if the company lets you cancel your annuity, it can get very expensive because of surrender charges. Surrender charges are a penalty charged by the annuity company when you end your contract early. The amount you would owe in surrender charges depends on the terms of your contract. Generally, the earlier you cancel your annuity, the more you will owe in surrender charges. Your contract should list the penalty schedule.
Some annuities limit surrender charges to your investment gains. This means that if you cancel your contract early, you get at the very least all your initial investment back. However, other companies deduct surrender charges from your deposit as well. This makes getting out of your contract even more expensive.
One possible way to get around these fees is through a partial surrender. With a partial surrender, you only take out a portion of your annuity money and leave the rest in the contract. It is common for annuity companies to waive surrender charges on partial surrenders up to a certain limit, for example up to 10% of your account per year. This isn’t helpful if you want to take all your money out but could be useful if you only need a little money. However, not all contracts waive surrender charges on partial surrenders so double check with your company first.
Another cost of getting out of an annuity is extra taxes. When you earn money in an annuity, your gains are tax-deferred. This means that as long as you keep the money invested in your contract, you don’t owe any taxes. The IRS created this tax rule to help Americans save for retirement. However, the bad side of this rule is it makes it more costly to take your money out of your annuity.
When you cancel your annuity, all your gains are immediately taxable as income. You’ll need to pay all those taxes the year you cancel your annuity. Cancelling your annuity can also lead to an extra penalty on top of income tax. Since the annuity follows retirement plan rules, you are supposed to keep your money in the plan until you are at least 59 ½. If you take your money out as a withdrawal or cancellation earlier, it is an early withdrawal. The IRS charges an extra 10% penalty on early annuity withdrawals.
When you consider all the surrender charges, taxes, and restrictions of cancelling an annuity, you can see why many investors assume they are stuck. However, there is one other way to get out that avoids most of these problems. If you are in an annuity and want to cash out, you can sell the contract to a structured settlement company. For the sale, you assign ownership of the contract to the settlement company so they will receive all future payments. In exchange, you receive a lump sum payment based on the amount you were due to earn.
By selling your annuity, you get a lump sum payout immediately so you don’t have to wait until your contract is over to get your money. In addition, since this only transfers the annuity and doesn’t end the contract, the annuity company won’t charge surrender fees. Unfortunately, this sale still has the same tax issues as ending your contract. You will owe income tax on all your gains from the sale and could owe the early withdrawal penalty if you are younger than 59 ½. However, despite the tax issues, selling your annuity to a structured settlement company is still the best way to get your money out.
How to get annuity money
This is a very common question for the Einstein clients. We want to help you get as much money as possible in the fastest amount of time. How we do this is we send you an advance for the money you need to raise from selling off your annuity payments. The next thing we do is we go through the legal motions and process for selling an annuity payment. This is court approved by a judge here in the United States of America and the payments or money that is owed to you as an annuity is transferred ownership.
The situation is very complex but we guide you through the whole process and get you the most amount of money you could possibly want.
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