What Happens at the End of an Annuity Contract: Payouts and Taxes

At the end of an annuity contract, the accumulation phase permanently ends on the contract’s maturity date and you have to decide how to take the money: as a lump sum, as a stream of income payments, or as a transfer into a new annuity. Many deferred contracts set that maturity date at age 95, though some use 100 or later. If you do nothing, the insurer applies the default payout written into your contract, and that default is usually irrevocable once it starts.

What the Maturity Date Actually Triggers

The maturity date is the point identified in your contract where accumulation stops. After it, the insurer no longer credits interest or reflects market gains, and it becomes obligated to distribute the accumulated value under whichever payout option you selected. Your insurer discloses this date in the policy schedule pages you received at purchase, and most insurers send a written notice as it approaches so you have time to evaluate options and submit paperwork.

The decision matters because annuitization — converting the accumulated value into a guaranteed income stream — is generally irrevocable. Once payments begin under a life or joint-life option, you lose access to the underlying funds and cannot change the payment structure.

What Happens If You Don’t Choose

The insurer does not hold your money indefinitely if you miss the deadline. Your contract contains a default payout provision that takes effect automatically. The specific default varies, but a common one is a life income annuity with a period certain, such as guaranteed payments for your lifetime with a minimum payment period of ten years. Some contracts default instead to a lump sum if the account value falls below a stated threshold, often around $5,000.

If that default does not match your financial needs, you can be locked into an income arrangement you did not choose. Reading the payout language in your contract well before the maturity date is the only way to avoid that outcome.

Your Payout Options

The right choice depends on your age, health, income needs, and whether you want to leave money to beneficiaries. Most contracts offer some version of the following.

Lump sum. You receive the entire accumulated value in a single payment. You gain full control over the money, but income tax hits all the earnings in one year, which can push you into a higher bracket.
Life annuity. The insurer pays you a fixed amount for as long as you live. Payments stop at death, so nothing remains for beneficiaries. Because the insurer bears the longevity risk, life-only payments are typically higher than the other income options.
Life annuity with period certain. You receive payments for life, but if you die before a guaranteed period expires (commonly 10 or 20 years), your beneficiary receives the remaining payments through the end of that period.
Joint and survivor annuity. Payments continue for your lifetime and then for the lifetime of a second person, usually a spouse. The survivor’s payment may match the original or drop to a set percentage such as 50% or 75%.
Fixed period. Payments run over a set number of years regardless of whether you are alive. If you die during the period, your beneficiary receives the remainder.

Once income payments begin under any of the annuitized options, the choice is permanent.

Rolling the Money Into a New Annuity

If you don’t need income yet, you can move the accumulated value directly into a new annuity contract without triggering tax. This is called a 1035 exchange, named after the tax code section that permits it: no gain or loss is recognized when you exchange one annuity contract for another annuity contract or for a qualified long-term care insurance contract.¹

The transfer must go directly from the old insurance company to the new one. If you personally receive the funds, even briefly, the IRS treats the money as a taxable distribution instead of a tax-free exchange. You apply for the new annuity, sign an exchange authorization form, and the new insurer contacts your current insurer to request the transfer. Once complete, the original insurer sends confirmation of the transfer amount and your cost basis, which carries over to the new contract.

A 1035 exchange resets any surrender charge schedule, so the new contract may impose a fresh set of early withdrawal fees. Compare the new contract’s interest crediting method, fees, and riders before authorizing the exchange, and make sure the features justify starting a new surrender period.

How the Distribution Is Taxed

Non-Qualified Annuities

A non-qualified annuity is one you purchased with after-tax money outside a retirement account. You owe income tax only on the portion of each distribution that represents investment earnings, not on the return of the money you originally put in. The IRS determines the tax-free portion using an exclusion ratio: your investment in the contract divided by the total expected return.² That ratio is applied to every payment, so part of each check is tax-free and part is taxed as ordinary income.³

If you invested $100,000 and your expected return under the contract is $200,000, your exclusion ratio is 50%. Half of each payment is a tax-free return of investment, and half is taxable as ordinary income.

Qualified Annuities

A qualified annuity is held inside a tax-advantaged account such as an IRA or employer plan. Because contributions went in pre-tax or were deductible, the entire distribution is taxable as ordinary income. There is no exclusion ratio because you never paid tax on the money going in.²

If your qualified annuity is subject to required minimum distributions, annuitizing into lifetime payments generally satisfies the RMD requirement, since the payment stream is designed to distribute the full value over your lifetime. If you take a lump sum or 1035-exchange into a new deferred annuity instead, you still need to meet RMDs each year on that money.⁴ Non-qualified annuities aren’t subject to RMD rules; distribution timing follows the contract.

Tax Reporting

Your insurer reports every distribution on Form 1099-R, which shows both the gross distribution and the taxable amount.⁵ You receive the form by the end of January following the year of distribution, and the figures should be used exactly as shown when filing your return.

If You Die Before the Payout Finishes

If you die after payments have started but before the entire value has been distributed, the remaining payments must continue to your beneficiary at least as quickly as they were going to you. A period-certain payment stream, for example, continues to your beneficiary through the end of the guaranteed period.²

If you die before the annuity starting date, non-qualified contracts follow different rules. The entire value must generally be distributed to your beneficiary within five years of your death. A named beneficiary can avoid the five-year deadline by electing to take payments over their own life expectancy, provided those payments begin within one year of the death.² A surviving spouse who is the designated beneficiary has more flexibility still and can be treated as the new owner of the contract.

Beneficiaries owe income tax on the earnings portion of inherited non-qualified annuity payments under the same exclusion ratio that applied to you. For inherited qualified annuities, the full distribution is taxable income to the beneficiary.⁶

How to Claim Your Payout

To process the distribution, the insurer verifies your identity and confirms how you want the funds delivered. Have the following ready before you contact them:

Contract number. The identifier assigned when you purchased the annuity, on your original policy documents and annual statements.
Social Security number. Required for tax reporting and identity verification.
Beneficiary information. Current names and contact details for anyone designated to receive funds if you die before full distribution.
Bank account details. Routing and account numbers if you want funds sent electronically.

You complete a distribution request form (sometimes called an Election of Option form) from the insurer, indicating your payout method and banking or mailing details. Some insurers require a notarized signature on high-value distributions. Errors in routing numbers or personal information delay payment, so check every field before submitting.

Most insurers accept electronic submissions through their online portals, though some still require mailed originals, and electronic filings usually process faster. Once the paperwork clears verification, electronic payments generally arrive within a few business days and mailed checks take longer. The insurer then issues a closing statement confirming the distribution amount and any tax withholding for your records.

1
Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Publication 939 – General Rule for Pensions and Annuities
4
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
5
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
6
Internal Revenue Service. Publication 575 – Pension and Annuity Income