Explainer
How do annuity surrender charges work?
By Secure Retirement PlannerUpdated
If you take out more than the free amount, or cancel, during the surrender period, the insurer charges you a fee called a surrender charge. It is a percentage of what you take out. It usually goes down each year until it reaches zero, often after six to ten years.
Most contracts let you take a small amount each year without the charge, often up to 10% of your value. Some also waive the charge if you go into a nursing home or become terminally ill. Learn these rules before you buy, especially if you might need the money for Roth conversion taxes, RMDs or health costs.
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The short version
- During the surrender period, you pay a percentage of the amount you take out above the free amount.
- Your charge usually drops each year until it reaches zero.
- A market value adjustment (MVA) can raise or lower what you get on early withdrawals, on top of the surrender charge.
- If your contract has a bonus, leaving early can also mean losing the part that hasn't vested.
- If you pay conversion tax or take large withdrawals from the annuity, you can trigger charges. You can often take RMDs without one, but check.
How does an annuity surrender charge schedule work?
The NAIC is the national group of state insurance regulators. It says the charge is a percentage of the amount you take out. That percentage usually goes down each year until the surrender charge period ends. Once the period is over, you can take any amount with no charge.
The length varies a lot. The SEC says surrender periods on indexed annuities are often six to ten years or longer. FINRA notes that variable annuities can lock up your money for eight years or more. Contracts with a bonus often have longer or steeper schedules.
Here is what a declining schedule can look like. This is a made-up example to show you the shape, not a typical or current contract.
| Contract year | Surrender charge | Charge on $10,000 above the free amount |
|---|---|---|
| 1 | 7% | $700 |
| 2 | 6% | $600 |
| 3 | 5% | $500 |
| 4 | 4% | $400 |
| 5 | 3% | $300 |
| 6 | 2% | $200 |
| 7 | 1% | $100 |
| 8 and later | 0% | $0 |
How much can I take out of an annuity without a surrender charge?
Most annuities with surrender charges let you take out a set amount each year with no charge. The NAIC buyer's guide says this is usually up to 10% of your account value.
The details vary, so read your contract or ask. Some measure 10% of what you paid in, others 10% of current value. Some don't allow a free withdrawal in the first year. Ask whether unused free amounts carry over to the next year.
A free withdrawal is free of the surrender charge, not free of tax. From an IRA annuity it is taxable income to you. Outside an IRA, your gains come out first and are taxed. If you are under 59½, the IRS can add a 10% penalty on the taxable part.
What is a market value adjustment (MVA) on an annuity?
An MVA is a separate adjustment some fixed and indexed annuities apply. It kicks in when you take more than the free amount during the surrender period. It is tied to interest rates.
Per the NAIC, if rates are higher when you withdraw than when you bought, the MVA can reduce what you get. If rates are lower, it can increase it. The SEC warns that these adjustments are often negative. They can lower your value a lot, and they come on top of any surrender charge.
Some contracts set a floor on how far the MVA can reduce your value. Ask for the floor in writing. Also ask whether the MVA applies to your free withdrawals and RMDs.
Are surrender charges waived for a nursing home or terminal illness?
Often, if your contract includes those waivers. The NAIC guide tells you to look for waivers for events such as death. Many contracts also waive the charge for a long nursing home or hospital stay, or a terminal illness. These are not in every contract or every state.
The rules have fine print. A waiver may not apply in the first contract year. It may require a stay of a set number of days. Or it may need a doctor to certify a short life expectancy. Some contracts are filed under the Interstate Insurance Product Regulation Commission's standards. For those, a waiting period can't be longer than 90 days.
- Death: the death benefit is usually paid without a surrender charge.
- Nursing home or hospital confinement: ask how many days in a row you must stay.
- Terminal illness: ask what life expectancy your doctor must certify.
- RMDs: some contracts let your required withdrawal from that contract come out free even if it is more than 10%. Some exclude the first year.
Can I lose my annuity bonus if I surrender early?
Yes. A premium bonus is an extra amount the insurer adds when you buy. The NAIC guide warns you may not be able to withdraw some or all of it for a set period. You can lose it if you take money out early. This is called recapture.
Bonus contracts often come with longer surrender periods, higher charges or lower rates. So you pay for the bonus one way or another. If you leave early, you can face a surrender charge, an MVA and a lost bonus at once. That can leave you with less than you put in. See Annuity bonuses explained for how vesting works.
Do Roth conversions, RMDs or paying conversion tax trigger surrender charges?
It depends on how your money leaves the contract. The table below shows the common cases if your annuity is in a traditional IRA.
A key rule helps you here. If you have more than one IRA, the IRS lets you add up your RMDs. You can then take the total from any one or more of them. So you can often take your whole RMD from a bank or brokerage IRA and leave the annuity alone. This does not apply to 401(k) plans. Use RMD calculator to estimate your amount.
Converting the annuity itself has its own tax rules. The IRS taxes the contract's fair market value. A surrender charge generally does not lower that value. See Converting an annuity to a Roth.
| Move | Surrender charge risk | What to ask |
|---|---|---|
| Take this year's RMD from the annuity | Low if the contract waives RMDs | Is the RMD waived, including in year 1? |
| Take the RMD from another IRA instead | None on the annuity | Does my custodian know the total RMD? |
| Convert the whole contract to a Roth (same insurer) | Often none, since the contract continues | Will you re-register it as a Roth? What value goes on the 1099-R? |
| Convert part of the contract | Charge on anything over the free amount, if treated as a withdrawal | Is a partial conversion a withdrawal? |
| Withdraw money to pay the conversion tax | Charge on anything over the free amount | How much is free this contract year? |
| Move to a new annuity (exchange) | Charge on the old contract, plus a new surrender period | What would I lose, and what restarts? |
Paying conversion tax from outside the annuity
Money you take from your IRA annuity to pay the tax is itself taxable. It may face a surrender charge. If you are under 59½, you can owe the 10% penalty. Paying the tax from your savings avoids all three and keeps more of your money growing in the Roth.
Can I cancel an annuity without a surrender charge?
Yes, during the free-look period. FINRA says it generally runs 10 to 30 days, depending on your state. Your contract should state it clearly.
What if you cancel in that window? The NAIC guide says that depending on your state, you get back either all of your money or your current account value. After the free look ends, the surrender schedule applies.
Who should avoid long surrender periods
Skip a long schedule if you may need the money in the next few years or don't have a separate emergency fund. Also skip it if you are paying for care now, or would be swapping an older annuity still in its own surrender period. Annuities are not FDIC insured, and their guarantees depend on the insurer's ability to pay claims.
Example: paying Roth conversion tax from an IRA annuity
Joan is 68. She has a fixed annuity inside her traditional IRA worth $200,000, now in contract year 3. Its hypothetical schedule charges 5% in year 3, and she may take 10% of the value each year with no charge.
She plans to convert part of another IRA and wants to take $30,000 from the annuity to cover the tax. The first $20,000 is free. The other $10,000 faces a 5% charge, or $500. The full $30,000 also counts as taxable income, which adds to her tax bill.
If she keeps the annuity withdrawal at $20,000, there is no surrender charge. If she pays the tax from savings, there is no charge and no extra taxable withdrawal.
If you hold an IRA annuity like Joan's, paying your conversion tax from savings avoids both the charge and the extra taxable income.
| Choice | Surrender charge | Extra taxable IRA income |
|---|---|---|
| Take $30,000 from the annuity | $500 | $30,000 |
| Take $20,000 (the free amount) | $0 | $20,000 |
| Pay the tax from savings | $0 | $0 |
Hypothetical example. The 5% year-3 charge and the 10% free withdrawal based on a $200,000 account value are made-up figures for illustration, not an offer or a typical contract. It ignores any market value adjustment, bonus recapture and state tax. Real contracts may figure the free amount and charges differently.
Common questions
What is a typical annuity surrender period?
Often six to ten years, according to SEC and FINRA investor guides, and sometimes longer. Your charge usually declines each year until it reaches zero.
Is the surrender charge applied to the whole account?
Usually it applies to the amount you take out above your free withdrawal amount. If you surrender in full, check your contract, since rules for the free amount differ.
Can I avoid surrender charges?
Stay within your free withdrawal amount, or wait until the surrender period ends. You may also qualify for a waiver such as death, a nursing home stay or terminal illness. Taking your RMDs from another IRA can also help.
Will I pay a surrender charge on my RMD?
Some contracts waive the charge on the RMD for that contract, and some of those exclude the first year. You can also take your whole IRA RMD from a different IRA.
Does a 1035 exchange avoid surrender charges?
No. A 1035 exchange can avoid income tax on the move. But your old contract can still charge its surrender fee, and the new one usually starts a new surrender period.
Do surrender charges apply after the owner dies?
The death benefit is usually paid without a surrender charge. Beneficiaries should ask the insurer how the payout options work.
Is my annuity FDIC insured?
No. Your guarantees depend on the insurance company's financial strength and claims-paying ability. State guaranty associations give limited coverage that varies by state.
Sources
Facts on this page were last checked on November 9, 2026.
- NAIC Buyer's Guide for Deferred Annuities (2013), hosted by New Jersey DOBI · Surrender charge as a declining percentage; free withdrawals usually up to 10%; waivers for events such as death; MVA direction; bonus may be lost; free look refund rules. Read Nov 9, 2026.
- SEC Investor.gov: Annuities · Surrender charges reduce value; contract adjustments (MVA) often negative and on top of surrender charges; 59½ tax penalties. Read Nov 9, 2026.
- SEC Investor.gov: Updated Investor Bulletin, Indexed Annuities (July 31, 2020) · Surrender periods of six to ten years or longer. Read Nov 9, 2026.
- FINRA: Annuities · Surrender period definition; variable annuity surrender periods of eight years or more; free-look 10 to 30 days; not FDIC insured; exchanges. Read Nov 9, 2026.
- Interstate Insurance Product Regulation Commission: Additional Standards for Waiver of Surrender Charge Benefit (adopted Aug 27, 2008) · Waiver triggers (confinement, limited life expectancy, disability, unemployment) and the 90-day maximum waiting period. Read Nov 9, 2026.
- IRS Publication 590-B, Distributions from IRAs · IRA RMDs may be totaled and taken from any one or more IRAs. Read Nov 9, 2026.
- IRS Publication 575, Pension and Annuity Income · Non-IRA annuity withdrawals come from earnings first; 10% additional tax before 59½. Read Nov 9, 2026.
Who wrote this
This guide was written and fact-checked by the Secure Retirement Planner editorial team using IRS, CMS and Social Security sources listed above. We update guides when the law or yearly limits change. How we research.