Cashing Out Your Annuity: Why and How

By Compuquotes Team on May 9th, 2008


First off, cashing out an annuity is a last resort. Period. There's not an honest investment professional that will tell you it's a good idea to dip into the money that you've saved for a rainy day, one of your children's educations, or your own retirement. That said, there are several reasons that you'll need to put your carefully structures plans aside. Life has a way of throwing financial curve balls at the most inappropriate times. No one can plan for the unfortunate illness of a loved one or the sudden need for a new vehicle or a little extra to cover a sudden loss of income.

  • Investment Plan

There are even times that you'll want to retrieve some annuity money for some manner of investment plan. Perhaps the property that you've always felt would make a great investment has just come up on the market and you don't want to miss what you're sure is a once-in-a-lifetime opportunity. All these roads, either the unfortunate or the prosperous, lead to one thing and that's cashing in an annuity.

  • Tip of the Iceberg

You'll need to think this through because deciding that you need the money and are ready to go through with the process is only the tip of the iceberg. There are several things that you'll need to consider before you cash an annuity out and one of these should be a careful consideration of the payment dates.

  • Payment Dates

It stands to reason that if you cash out a annuity early you won't get the full price-or in other words what it would be worth had it been allowed to mature. This merits some consideration because often when you go ahead and cash out early, you'll get less then one quarter of the total that you could have expected at the final payment date. Beyond medical emergencies or a crisis that could affect the equity you have in your home or other property, cashing out an annuity early is often the old tortoise and the hare dilemma. Sometimes the short-term gain will cloud your ability to see that long-term stability is the better option.

The decision might be easier than you think if you let the government get involved to help you make it. A portion of the balance of the annuity that could be forfeited over to the government if you decide to cash in early. And generally there's no way around those kinds of tax penalties. Even if you buy another annuity, there will still be a penalty since in the eyes of the government the cash has already passed through your hands.

Still, you shouldn't be dissuaded in all circumstances. There are reasons like the ones stated above that will make taking a loss on one annuity a plan that can bring a bigger prosperity your way, but the catchword is caution. Deciding to tinker with the kind of 'piggy bank' that you hadn't planned on opening for years needs to be an affair that considers all the options and consequences.

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