Free Withdrawals in Annuities
One of the most common critiques of annuities is their limited liquidity. That concern is valid in many cases. When you purchase an annuity, you’re giving up full access to your funds in exchange for benefits like guaranteed lifetime income, protection from market losses, or steady growth backed by the insurer.
That said, today’s annuities are more flexible than many people realize. Some offer guaranteed income riders that can be turned on or off, while still preserving access to some of your contract value. And most fixed and fixed index annuities include a feature known as a free withdrawal.
What Is a Free Withdrawal?
A free withdrawal lets you access a portion of your annuity value each year without triggering a surrender charge. The exact amount varies by contract, but it’s often 5% or 10% of your accumulation value annually.
Withdraw more than your free withdrawal allowance and you’ll face a back-end surrender charge on the excess. For instance, if your limit is 5% and you take 7%, the extra 2% would be subject to penalties.
Keep in mind, all withdrawals are still taxable as ordinary income. If you’re under age 59½, a 10% IRS early withdrawal penalty may also apply.
Mistake #1: Assuming you can withdraw any amount from your annuity without penalty.
Action: Know your free withdrawal limit and stay within it. Exceeding the limit—even slightly—can trigger surrender charges and tax penalties. Foxcove Financial can help you review your contract’s specific rules so you don’t get caught off guard.
Maximum Amount You Can Withdraw
Most fixed and fixed index annuities allow up to 10% in free withdrawals annually. However, Multi-Year Guaranteed Annuities (MYGAs) often cap this at 5% due to their higher interest guarantees.
Some contracts let you access this liquidity right away in year one, while others require a one- or two-year waiting period. It depends entirely on the product. Reviewing your specific contract terms is essential.
How Long Are Free Withdrawals Available?
Free withdrawals are typically allowed during the annuity’s surrender charge period—usually between 3 and 10 years for fixed contracts, though some can run as long as 15 years. Once the surrender period ends, you may have full access to your money without fees.
Why Free Withdrawals Exist
Withdrawal provisions are there for a reason. These limits help insurance companies manage long-term commitments and protect the guarantees they’ve promised. Here’s why they matter:
- They reduce the risk of mass exits. Just like banks, insurers need to guard against liquidity runs that could destabilize their obligations.
- They support long-term investing. Insurers back annuities with medium- to long-term investments. Early or large withdrawals can disrupt their ability to manage reserves.
- They protect all policyholders. Limits prevent one person’s exit from weakening the overall pool that supports every contract.
- They encourage long-term use. Annuities are designed as retirement vehicles, not short-term accounts. The withdrawal rules align with that purpose—and breaking them can result in taxes, surrender charges, and penalties.
Withdrawing Money in an Emergency
Need cash quickly? Staying within your free withdrawal amount helps you avoid unnecessary penalties. But many annuities also include emergency access clauses. These can cover things like nursing home confinement, terminal illness, or other life events.
If you think this may apply to you, check your contract terms—or connect with Foxcove Financial to review access options that may be available.
Special Options and Riders
Some annuities offer enhanced withdrawal flexibility through features like:
- Cumulative Free Withdrawals: If you don’t use your free withdrawal one year, some contracts let you roll it forward. Over time, this could allow access to 20–30% or more.
- Liquidity Riders: Certain riders increase your annual access (e.g., from 5% to 10%). These come at a cost—often around 0.95% annually—so they only make sense if you truly need that added flexibility.
These riders can provide more liquidity when needed—but they also reduce the net return on your annuity. Make sure the benefits justify the additional cost.
Withdrawal Feature Comparison
| Annuity Type | Standard Free Withdrawal | Cumulative Option | Liquidity Rider Available |
|---|---|---|---|
| Fixed Annuity | Up to 10% | ❌ | ✅ |
| Fixed Index Annuity (FIA) | Up to 10% | ✅ | ✅ |
| MYGA (Multi-Year Guaranteed) | Up to 5% | ❌ | ❌ |
Who Free Withdrawal Features Are For
- ✅ Those who want partial liquidity while preserving long-term growth
- ✅ Individuals concerned about surrender charges or emergency access
- ✅ Pre-retirees planning to use annuities for supplemental income
- ✅ Clients who want flexibility without giving up principal protection
Takeaway: Free withdrawal provisions give you flexibility—but that flexibility is limited. Knowing how much you can access and when helps you avoid unnecessary fees or missed opportunities.
Foxcove Financial can help you evaluate fixed and fixed index annuity options with the right balance of access, guarantees, and long-term income strategy.
Understanding how and when you can access your annuity matters. Foxcove Financial can help you compare options, evaluate surrender schedules, and select contracts with the right mix of income guarantees and access flexibility.
Looking for Guidance?
If you’re ready to take the next step in planning your retirement with confidence, Foxcove Financial is here to help. We’ll walk you through your options, answer your questions, and help you evaluate solutions that align with your long-term goals. We specialize in insured strategies designed to protect and grow your retirement income. Call us at 609.807.8502 or schedule an appointment.