Sell My Annuity: How to Get Cash Out of an Annuity (and What It Costs)
Written & reviewed by Hans Goldstein, EA, Independent Licensed Insurance Producer · CA license 4273294 · NPN 20602398Admitted to practice before the IRS
Independently reviewed & last updated 2026-10-22
Short answer: you usually can't "sell" a deferred annuity. You get cash by taking a free withdrawal, surrendering part or all of it, or moving it with a 1035 exchange. Only an annuity that is already paying you a stream of payments can be sold, and the buyer pays you a discounted lump sum for it.
The cheapest way out is almost always the free withdrawal first, then waiting out the surrender schedule if you can. Selling payments to a buyer is usually the most expensive option.
What "selling" an annuity actually means
There are two very different things people mean by "sell my annuity."
- A deferred annuity you're still growing (MYGA, fixed indexed, variable). There is no market for these. You can't sell the contract to someone else. You get money out by withdrawing or surrendering it with the insurance company that issued it.
- An annuity that is already paying you (an annuitized contract, a structured settlement, a lottery prize). Here a factoring company will buy some or all of your future payments for a lump sum today, at a discount.
If you're not sure which one you have, look at your last statement. If it shows an account value and a surrender value, it's deferred. If it shows a fixed payment schedule and no account value, it's a payout annuity.
Why it matters which way you go
Every exit has a different price. Some cost nothing, some cost a surrender charge, and some cost a large discount on the money you're owed.
Taxes also change with the route you pick. Two people with the same contract can walk away with very different amounts.
How to get cash from an annuity: every option side by side
| Option | What it costs you | Taxes | Best for |
|---|---|---|---|
| Free withdrawal | Nothing, up to the contract's free amount (many contracts allow about 10% of the value a year) | Gain comes out first and is taxed as ordinary income | Needing some cash, not all of it |
| Partial surrender | Surrender charge on the amount above the free withdrawal, plus any market value adjustment (MVA) | Gain first, ordinary income | A one-time need larger than the free amount |
| Full surrender | Surrender charge plus any MVA, and you lose the guarantees | All gain taxed in one year | Contracts past or near the end of the schedule |
| 1035 exchange | Old contract's surrender charge still applies; no cash in hand | No tax if done as a direct exchange | A bad contract you want to replace, not cash out |
| Annuitize | You give up the lump sum for a payment stream, usually for good | Each payment part taxable, part return of basis | Turning the money into steady income |
| Sell future payments | A discount set by the buyer; structured settlement sales need a judge's approval | Depends on the payments being sold | Payout annuities only, as a last resort |
| Annuity loan | Most annuities don't offer one; on a non-qualified annuity a loan is treated as a withdrawal | Taxed like a withdrawal | Some 403(b) and plan annuities only |
How surrender charges work
A surrender charge is a percentage the insurer keeps if you take out more than the free amount during the surrender period. It shrinks each year and reaches zero at the end of the schedule.
Many fixed contracts also carry a market value adjustment. If rates have risen since you bought, the MVA can lower what you get; if rates have fallen, it can raise it. The full mechanics are in my guide to annuity surrender charges, and you can run your own contract through the surrender charge calculator.
Check your contract for waivers before you pay a charge. Many contracts waive surrender charges for nursing home confinement, terminal illness, or death.
How taxes work when you cash out
- Non-qualified annuity (bought with after-tax money): withdrawals come out gain first. Every dollar of gain is ordinary income before you get any of your original premium back tax-free (IRC §72(e)).
- Qualified annuity (inside an IRA or plan): the whole withdrawal is usually taxable, because the money went in pre-tax.
- Under 59½: the taxable part also carries a 10% additional tax unless an exception applies, such as death, disability or a series of substantially equal payments (IRC §72(q) for non-qualified, §72(t) for IRAs).
- Paperwork: the insurer sends a Form 1099-R for the year you take the money.
More detail: annuity early withdrawal penalty and how non-qualified annuities are taxed.
A worked example (illustrative numbers only)
These numbers are made up to show the math, not taken from any real contract. Say your non-qualified annuity is worth $100,000. You paid $70,000 in, so $30,000 is gain. You're in year 3 of a 7-year schedule with a 6% charge, and the contract allows a 10% free withdrawal.
- Take the free withdrawal: you get $10,000 with no surrender charge. Because gain comes out first, all $10,000 is taxable income.
- Surrender it all: assuming the 6% charge applies to the $90,000 above the free amount, the charge is $5,400 and you receive $94,600. Your taxable gain is $94,600 minus your $70,000 basis, or $24,600, all in one tax year.
- Wait four years: once the schedule ends, you get the full value with no charge. Same tax, no $5,400 cost.
On these numbers, needing $10,000 now and the rest later costs nothing. Needing everything now costs $5,400 plus the tax on $24,600 landing in a single year.
Who should do what
- You need a little cash: take the free withdrawal. Spread larger needs across two calendar years to use two years of free withdrawals.
- You need all of it and the schedule is almost over: compare the charge left to the cost of waiting. A few months can be worth thousands.
- You don't need cash, you just hate the contract: look at a 1035 exchange instead of surrendering, so the gain stays tax-deferred.
- You have a payout annuity and a real emergency: get quotes from more than one buyer, and sell only the payments you need to, not the whole stream.
- You inherited an annuity: you can usually take a lump sum, but the gain is taxable to you. Spreading payouts can lower the tax.
Frequently asked questions
Can I sell my annuity for a lump sum?
Only if it's already paying you. A factoring company can buy future payments from an annuitized contract or structured settlement for a discounted lump sum. A deferred annuity can't be sold; you surrender it with the insurer instead.
Can I cash out an annuity without a penalty?
Yes, up to the contract's free withdrawal amount, or after the surrender period ends. The IRS 10% additional tax is separate: it applies to the taxable part if you're under 59½ and no exception applies.
Can you take money out of an annuity before 59½?
Yes. The insurer will pay you, but the taxable part is usually hit with the 10% additional tax on top of income tax. Exceptions include death, disability and a series of substantially equal payments.
Can I cash out an inherited annuity?
Usually yes. The gain above what the original owner paid in is taxable to you as ordinary income. Taking it over the years the contract and tax rules allow, instead of all at once, can lower the bill.
What are the tax implications of surrendering an annuity?
On a non-qualified annuity, the gain is ordinary income in the year you surrender, and the insurer reports it on Form 1099-R. On a qualified annuity, usually the whole amount is taxable. A large surrender can push you into a higher bracket for that year.
Is it better to surrender or do a 1035 exchange?
If you need the cash, surrender. If you only want out of the contract, a 1035 exchange moves the money to a better annuity without triggering tax on the gain. The old contract's surrender charge applies either way.
Need cash from your annuity? Find the cheapest way out first.
Send your email and I'll look at your contract with you: the free withdrawal you have, what the surrender charge costs this year versus next, and the tax on each route. If keeping it is the right call, I'll tell you that.
We’ll email it to you. Hans reads every one himself and replies within one business day. Hans Goldstein · NPN 20602398.
Rather talk it through? Or book 15 minutes on Hans’s calendar.