First, you must gather your annuity information. If you have more than one annuity, you’ll need to add up the value of all of your annuity accounts. Make note of all of your annuity account numbers.
You’ll need them when you request a surrender of your contracts. The insurer must be notified when you wish to cash in your annuities. If you have annuities with more than one insurance company, each insurer must be contacted. Insurance companies may have slight variations on the exact procedures for surrendering (cashing in) an annuity.
Surrender Form
You must obtain a form from the insurance company. Normally, this is a surrender form. The form allows you to indicate what policies you want to surrender as well as the amount of money that will be received from the annuity. You must sign the form and return it to the insurance company. When you do, the insurer will process your request. It may take up to four weeks to process your paperwork and send you the funds from your annuity.
Taxes & Penalties
You may notice that the money you receive is less than the total amount of money that is listed on your annuity statement from the insurance company. This might be because the insurer often imposes a penalty for cashing in the annuity before the date specified on the contract. If you prematurely cashed in your annuity, a penalty is imposed and deducted from the total annuity’s account value.
You must report any gains you experience from the annuity on your taxes. Note that you cannot deduct annuity penalties imposed by the insurance company. Even if this causes you to lose money on the contract, you must pay income tax on the fees you paid to the insurer.
The insurance company will send you a 1099-INT at the end of the year, documenting the interest earned on the annuity account. On top of that, if you are under age 59 1/2, you will be assessed a penalty of 10 percent by the IRS.
Consideration
Instead of cashing in the annuity, consider keeping the contract. This is especially true if the contract would incur a surrender penalty or if you are under age 59 1/2. If you really need the money, or you want to withdraw money without a penalty from the IRS, you may elect to choose to make withdrawals under IRS rule 72(q). This rule allows you to make withdrawals from your annuity prior to age 59 1/2. In order to take withdrawals under 72(q), you must make withdrawals based on your life expectancy at the time of the withdrawal and you must also make withdrawals for at least 5 years or until your age 59 1/2, whichever comes later.