What is an Annuity Free Withdrawal?
An annuity free withdrawal is the amount you can take out of a fixed or fixed index annuity each contract year without paying a surrender charge. On most contracts that amount is 10% of the account value. Anything above it is charged the surrender penalty, and every dollar you take out can still be taxed.
How an annuity free withdrawal works
During the surrender charge period, the insurance company charges a penalty on money you pull out early. The free withdrawal provision carves out a slice you can take each year without that penalty.
- Typical amount: 10% per contract year. Some contracts allow 5% or 15%, and some allow only the interest credited.
- What the percentage is based on: usually the account value on the last contract anniversary. Some contracts use the premium you paid instead.
- When it starts: many contracts allow it from the first year, but some wait until the second contract year.
- When it resets: on each contract anniversary, not on January 1.
- Carryover: on most contracts, an amount you skip this year does not roll over to next year.
- How you take it: as one lump sum or as monthly, quarterly or annual payments, as long as the year’s total stays under the limit.
Example: what happens when you go over the free amount
Say you put $100,000 into an annuity with a 10% free withdrawal and an 8% surrender charge in year 2. You need $15,000 that year.
| Step | Amount |
|---|---|
| Free withdrawal (10% of $100,000) | $10,000, no surrender charge |
| Excess withdrawal | $5,000 |
| Surrender charge on the excess (8% of $5,000) | $400 |
Hypothetical example for illustration only. Your contract’s surrender schedule and free withdrawal terms control the actual figures.
Only the excess is charged, not the whole withdrawal. If the contract has a market value adjustment (MVA), the excess can also move up or down with interest rates. On most contracts the MVA does not apply to the free amount.
Free withdrawals by annuity type
- Multi-year guaranteed annuities (MYGAs): terms vary the most. Some allow 10% a year, some allow interest only, and some sell the 10% free withdrawal as an optional rider. Wichita National Life, for example, sells its Security 5 MYGA both without and with a 10% free withdrawal rider.
- Fixed index annuities (FIAs): 10% a year is the most common. Money withdrawn mid-term may miss that term’s index credit, and withdrawals reduce the income base of any income rider.
- Immediate annuities: there is usually no free withdrawal, because you traded the lump sum for guaranteed income.
Withdrawals that are penalty-free beyond the 10%
Many contracts waive the surrender charge in other situations too. Check your contract for each one:
- Required minimum distributions: most qualified (IRA) annuities let you take your RMD from that contract without a surrender charge, even if it is more than 10%.
- Nursing home waiver: full or partial access after a qualifying stay, often after a waiting period.
- Terminal illness waiver: access after a qualifying diagnosis.
- Death: most contracts pay the beneficiary without a surrender charge.
- End of the surrender period: once it ends, you can take any amount without a surrender charge.
Penalty-free does not mean tax-free
A free withdrawal only skips the insurance company’s surrender charge. The IRS still taxes it under its own rules:
- Non-qualified annuities: withdrawals come out of earnings first, taxed as ordinary income, until all the gain is gone (IRS Publication 575).
- Qualified annuities (IRAs): the whole withdrawal is usually taxable, and RMD rules apply (IRS Publication 590-B).
- Before age 59½: the taxable part can owe an extra 10% federal tax unless an exception applies (26 U.S. Code § 72).
How to get the most from your free withdrawals
- Know your anniversary date. The free amount resets on it, so a withdrawal a few weeks later can be penalty-free.
- Split large needs across two contract years. Take 10% just before the anniversary and 10% just after it.
- Take RMDs from the annuity itself. RMD waivers usually cover only the RMD calculated on that contract.
- Filter by free withdrawal before you buy. When you compare fixed annuity rates in our online annuity marketplace, use the free withdrawal filter to show products with 10% free withdrawals, interest-only withdrawals or no free withdrawals. Annuities with no free withdrawals typically pay a higher interest rate.
- Do not move money just to get access. A 1035 exchange out of a contract still in its surrender period can trigger the full charge.
Before your next contract anniversary, find your contract’s annuity free withdrawal percentage, its base and its waivers, so you know exactly how much you can take without a penalty.
Already own an annuity? Get a free annuity audit
Send us your most recent annuity statement and we will send back a written report on what the contract does, what it costs you, and whether a move would leave you better off after any surrender charge. No cost, and no obligation to change anything.
Frequently Asked Questions
Is the 10% free withdrawal based on account value or premium?
It depends on the contract. Most use the account value on the last contract anniversary, and some use the premium you paid. Your contract’s free withdrawal section says which.
Are RMDs penalty-free?
On most qualified annuities, yes. The RMD calculated on that contract can usually be taken without a surrender charge, even above 10%, but confirm it in your contract. For rule changes, see our SECURE Act 2.0 summary.
Do nursing home or terminal illness waivers affect free withdrawals?
They add to them. Many contracts allow extra penalty-free access after a qualifying nursing home stay or a terminal illness diagnosis. These waivers often have a waiting period, so read the rider before you need it.
Does an unused free withdrawal carry over to next year?
On most contracts, no. The free amount resets on each contract anniversary, and any part you did not use is lost.
Can I take my free withdrawal in the first year?
Many contracts allow it, but some MYGAs and FIAs wait until the second contract year. Others allow only the interest credited in year one.
Is a free withdrawal taxable?
Usually, yes. “Free” means no surrender charge, not no tax. Earnings come out first on a non-qualified annuity, and IRA withdrawals are generally fully taxable.
