What are the implications of early withdrawal from an annuity?

The implications of early withdrawal from an annuity primarily involve surrender charges and potential tax penalties. When an individual withdraws funds from an annuity before a specified period, typically during the account's surrender charge period, the insurance company may impose a surrender charge. This charge is a percentage of the amount withdrawn and is meant to recoup some of the costs associated with the initial sale of the annuity.

Additionally, any earnings withdrawn from the annuity could be subject to income tax, and if the owner is under the age of 59½, there may also be a premature withdrawal penalty from the IRS, which adds to the financial implications of early withdrawal. This penalty is often an additional 10% on top of the regular taxation of earnings. These fiscal consequences serve as important considerations for annuity owners, emphasizing the necessity for careful planning and consultation before making withdrawals.