The right time to start taking money out of your annuity is usually after you turn 59½ and after your contract’s surrender period has ended, but no later than the required minimum distribution deadline if the annuity is held inside a Traditional IRA, 401(k), or similar pre-tax account. Three separate clocks control the decision: a federal tax clock at age 59½, an insurance company clock tied to your contract’s surrender schedule, and, for qualified annuities, an IRS clock that forces distributions once you reach age 73 or 75. Pulling money before those clocks align can cost you a 10% federal penalty, a surrender fee of several thousand dollars, or both. Waiting past the RMD deadline on a qualified contract carries an even harsher 25% excise tax on the shortfall.
Why Age 59½ Is the First Milestone
Federal tax law treats 59½ as the age at which annuity earnings become penalty-free. Withdraw taxable gains before that date and you owe a 10% additional tax on top of ordinary income tax. The rule sits in Section 72(q) of the Internal Revenue Code for non-qualified annuities and in Section 72(t) for annuities inside qualified retirement accounts.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
With a non-qualified annuity (one you bought with after-tax money), the IRS applies an earnings-first rule to partial withdrawals. Gains come out of the contract before your original principal does. If your annuity has grown from $100,000 to $150,000 and you take out $30,000 before 59½, the full $30,000 counts as earnings. You pay ordinary income tax on all of it and add a $3,000 penalty on top.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
The penalty does not apply to distributions taken on or after age 59½, distributions taken because of disability, or distributions structured as substantially equal periodic payments over your life expectancy.2Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: 10-Percent Penalty for Premature Distributions For most people, waiting until after 59½ is the simplest way to keep the full amount.
Taking Income Before 59½ Without the Penalty
If you need annuity income earlier, a 72(t) plan of substantially equal periodic payments avoids the penalty. You take a fixed amount each year, calculated from your life expectancy or the joint life expectancy of you and a beneficiary.3Internal Revenue Service. Substantially Equal Periodic Payments
The trade-off is commitment. Once payments start, you cannot change the amount or take extra money from the same account. Payments must continue until the later of five full years from the first payment or the date you turn 59½. Start at 54 and you continue at least until 59½. Start at 57 and you continue until 62, even though you crossed 59½ years earlier.3Internal Revenue Service. Substantially Equal Periodic Payments
Break the schedule for any reason other than death or disability and the IRS retroactively imposes the 10% penalty on every payment you received under the plan, with interest added for the entire deferral period.3Internal Revenue Service. Substantially Equal Periodic Payments The math only works if you are certain you can hold to the schedule for the full required stretch.
Your Contract’s Surrender Period
Even after you clear 59½, your insurance company may charge a surrender fee for taking money out. Most policies impose surrender charges for a set window (commonly six to ten years from each premium payment) on withdrawals above a specified threshold. Many contracts let you take up to 10% of the account value each year without a fee.4Investor.gov. Surrender Charge
The fee usually declines each year. A typical schedule might start at 7% in year one and drop by one percentage point annually until it reaches zero. On a $100,000 early withdrawal during a year with a 7% charge, the insurer keeps $7,000. Once the surrender period ends, the fee disappears entirely.
Check how your specific contract handles multiple deposits. Some carriers apply one surrender schedule that runs from the original purchase date. Others use a rolling schedule, where each new deposit starts its own multi-year clock. Under a rolling schedule, money you added three years after purchase could still carry several years of surrender charges long after the original deposit is free to access.
Waivers That Unlock Access Early
Many contracts waive surrender charges under specific hardship conditions. Common triggers include a terminal illness diagnosis, at least 90 consecutive days of nursing home confinement, total disability before age 65, or certification as chronically ill (unable to perform at least two activities of daily living without help).5SEC.gov. Waiver of Surrender Charges Rider Waivers usually do not take effect until the first policy year has ended, and the conditions vary between carriers. Read your contract before assuming you qualify.
The Latest You Can Wait: Required Minimum Distributions
If your annuity sits inside a Traditional IRA, 401(k), or similar pre-tax account, you cannot postpone withdrawals forever. Federal law sets a mandatory start date. For people who turned 72 after 2022 and will turn 73 before 2033 (generally those born between 1951 and 1959), required minimum distributions must begin at age 73. For those born in 1960 or later, the starting age rises to 75 beginning in 2033.6Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
Your first RMD is due by April 1 of the year after you reach the applicable age. Every distribution after that is due by December 31.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The amount is calculated from your prior year-end balance and IRS life expectancy tables.
Delaying your first distribution to that April deadline creates a trap. Your second-year RMD is still due by December 31 of the same calendar year, so two taxable distributions land in one tax year. If you turn 73 in 2026, you could push the first RMD to April 1, 2027, but the 2027 RMD is still due by December 31, 2027.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Doubling up can push you into a higher tax bracket and raise your Medicare premiums. Taking the first RMD in the year you actually reach the applicable age avoids that.
Missing an RMD is expensive. The IRS imposes a 25% excise tax on the shortfall between what you should have taken and what you actually withdrew.8eCFR. 26 CFR 54.4974-1 – Excise Tax on Accumulations in Qualified Retirement Plans Correct the mistake within two years and the penalty drops to 10%. You can also request a waiver by filing Form 5329 with a written explanation showing the shortfall was a reasonable error and that you are fixing it.9Internal Revenue Service. Instructions for Form 5329
How the Withdrawal Will Be Taxed
Every taxable dollar you pull from an annuity is taxed as ordinary income, not at capital gains rates.10Internal Revenue Service. Publication 575, Pension and Annuity Income That matters when you decide how much to take and when.
Partial withdrawals from a non-qualified annuity follow the earnings-first rule already described: gains come out and are taxed before your principal.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts If you convert the contract into a stream of regular payments (annuitize it), each payment splits into a taxable portion and a tax-free portion using an exclusion ratio. That ratio is your original investment divided by the total expected return over the payment period. Invest $100,000 with an expected lifetime return of $200,000, and half of each payment is tax-free.11Internal Revenue Service. Publication 939, General Rule for Pensions and Annuities
Annuities held inside Traditional IRAs, 401(k) plans, and other pre-tax accounts work differently. Because the money going in was never taxed, every dollar coming out is fully taxable as ordinary income. No exclusion ratio, no tax-free return of principal.10Internal Revenue Service. Publication 575, Pension and Annuity Income
Spreading Withdrawals to Protect Medicare and Social Security
A single large withdrawal can raise your Medicare premiums and increase the taxable share of your Social Security benefits, so the timing of your withdrawals matters as much as the age at which you start.
Medicare Part B and Part D premiums are income-tested. If your modified adjusted gross income clears the thresholds, you pay a monthly Income-Related Monthly Adjustment Amount surcharge. For 2026, the standard Part B premium is $202.90 per month. Single filers with income above $109,000 (or joint filers above $218,000) pay an additional $81.20 to $487.00 per month depending on the bracket. At the highest bracket (individual income at or above $500,000), the total monthly Part B premium reaches $689.90. Part D coverage carries its own separate IRMAA surcharge on the same brackets, adding up to $91.00 per month at the top tier.12Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
IRMAA is based on your tax return from two years earlier, so a large 2026 withdrawal shows up on your 2028 Medicare bill. Spreading the same total across several years can keep you under a surcharge threshold.
Annuity income also feeds the combined income formula the IRS uses to tax Social Security benefits. Combined income equals your adjusted gross income plus tax-exempt interest plus half of your Social Security benefits. Above $25,000 for single filers or $32,000 for joint filers, up to 85% of benefits become taxable.13Social Security Administration. Must I Pay Taxes on Social Security Benefits? Those thresholds have not been adjusted since 1993, so most retirees with meaningful annuity income cross them.
If You Inherited the Annuity
The timing rules above assume you bought the annuity yourself. If you inherited one, your withdrawal deadline depends on your relationship to the deceased owner and when they died.
A surviving spouse has the most flexibility. You can treat the inherited annuity as your own (using your age and life expectancy for future distributions) or take life expectancy payments from the inherited account.14Internal Revenue Service. Retirement Topics – Beneficiary
Most non-spouse beneficiaries who inherited after 2019 must empty the account by the end of the 10th year following the owner’s death. If the owner died after reaching their required distribution age, annual distributions are also required during that 10-year window. A narrow group of eligible designated beneficiaries can still stretch payments over their own life expectancy: minor children of the deceased owner (until they turn 21, at which point the 10-year clock starts), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased owner.14Internal Revenue Service. Retirement Topics – Beneficiary Every taxable dollar you take from an inherited annuity is reported as ordinary income in the year you receive it.