Can I Borrow Money From My Retirement Annuity? | Fees Matter

You may be able to pull cash from an annuity, yet it’s rarely a true “borrow” and the contract’s charges can bite.

You’re short on cash and you see a big balance inside your retirement annuity. It’s tempting to treat it like a personal bank. “I’ll just borrow it, then pay it back.” With annuities, that idea can get messy fast.

Here’s the plain truth: many annuities don’t offer a clean loan feature the way some workplace plans do. What people call “borrowing” is usually one of three moves: a loan against the contract (available on some contracts), a partial withdrawal, or a full surrender. Each one can trigger contract charges, tax bills, or both.

This article helps you figure out what your annuity can do, what it’ll cost, and what to check before you sign a form you can’t unsign.

What “Borrowing” From An Annuity Usually Means

An annuity is an insurance contract. Your money sits inside that contract under rules written in the policy. Those rules decide whether you can take money out, how much you can take, and what the insurer charges for early access.

When someone says they want to borrow from a retirement annuity, they’re usually picturing a loan with a payment schedule and interest that goes “back to me.” In annuity land, there are two setups people confuse:

• Contract loan (if offered): The insurer lends you money using your annuity value as collateral. Interest applies. If you don’t repay, the outstanding loan can reduce benefits and can create a tax mess if the contract terminates.
• Withdrawal or surrender: You take your own money out. That’s not a loan. It’s a distribution, and it can trigger surrender charges, market value adjustments on some products, and tax consequences.

So the first win is naming the move correctly. Once you do that, the costs become easier to spot.

Start with one question: is it qualified or nonqualified?

“Retirement annuity” can mean different tax wrappers:

• Qualified annuity: Held inside a tax-advantaged account or plan (like an IRA annuity, a 403(b) annuity, or a qualified plan annuity). Distributions follow retirement-account rules.
• Nonqualified annuity: Bought with after-tax money outside an IRA/plan. Earnings are tax-deferred, and withdrawals are generally taxed as ordinary income on the earnings portion.

This distinction shapes taxes and penalties. The contract rules still matter, yet the tax rules can change the real cost.

Can I Borrow Money From My Retirement Annuity? With Real-World Options

Yes, you might get cash out, yet the “borrow” label can hide what’s really happening. Think in options:

Option 1: A contract loan (only if your policy allows it)

Some annuities include a loan provision. Many don’t. If yours does, the insurer sets the loan rate and limits. You may be able to borrow up to a portion of the cash value. You’ll pay interest, and if you don’t repay, your future value and income payments can shrink.

Another catch: an unpaid loan can become a problem if the contract lapses or gets surrendered. At that point, tax rules can treat the outstanding amount like a distribution. That’s where people get blindsided.

Option 2: A “free-withdrawal” amount during the surrender period

Many annuities let you withdraw a limited amount each year without a surrender charge. Commonly it’s a percentage of the account value, spelled out in the contract. Take more than the allowance and the surrender charge can apply to the excess.

If your annuity is variable, early withdrawals may also run into surrender charges during a set surrender period. Investor.gov explains how surrender charges work and how long these periods often last in practice: Variable Annuity Surrender Charges.

Option 3: Partial withdrawal (charges may apply)

A partial withdrawal is simple on paper: you request a dollar amount, and the insurer sends it. The bill shows up later. Depending on contract type, you might face surrender charges, rider adjustments, and tax withholding.

If the annuity is inside a retirement plan, the plan’s distribution rules can also limit timing and amounts.

Option 4: Full surrender (largest friction, biggest paperwork)

Surrender means ending the contract and taking what’s left after charges. If you’re still in the surrender period, the surrender charge can be steep in early years. Some products also apply a market value adjustment.

If you’re weighing surrender, read the insurer’s schedule line by line. FINRA’s overview of annuities is a solid refresher on contract costs and restrictions: FINRA’s Annuities Overview.

Option 5: A 1035 exchange (cash relief, no; reshuffle, yes)

If your real issue is “this annuity no longer fits,” you might be thinking about switching. A 1035 exchange can move value from one annuity to another without triggering immediate tax on deferred earnings, when done correctly. That does not put cash in your pocket, yet it can be a path to lower ongoing costs or better features.

Still, an exchange can restart surrender periods and fees on the new contract. So it’s a “change lanes” move, not a cash bridge.

Costs That Turn “Borrowing” Into An Expensive Day

Before you touch the annuity, map the costs in two buckets: contract costs and tax costs. Contract costs hit right now. Tax costs hit at filing time, and sometimes also through withholding.

The SEC’s investor bulletin on variable annuities walks through the kinds of charges tied to these contracts and why reading the prospectus matters: SEC Investor Tips: Variable Annuities.

Contract costs you can see on the statement

• Surrender charges: A fee for taking out too much too soon.
• Rider adjustments: Some income or benefit riders reduce or end if you withdraw beyond set limits.
• Market value adjustment: Found on some fixed annuities; it can raise or cut what you receive when you exit early.
• Loan interest: If a loan feature exists, interest is part of the deal.

Tax costs that depend on your age and account type

Taxes are where people get tripped. The IRS outlines how pension and annuity payments can be taxed, and how distributions get reported, in its guidance on pension and annuity income: IRS Publication 575.

Two common tax pain points:

• Ordinary income on earnings: Nonqualified annuities generally treat earnings as taxable when withdrawn.
• Early distribution tax: If you’re under age 59½, an extra 10% tax can apply to the taxable part of certain early distributions. The IRS explains general pension and annuity taxation in Topic No. 410 (Pensions and Annuities).

Age, disability status, and the reason for the distribution can change outcomes. You want to know the rule that fits your case before you move money.

What To Check In Your Contract Before You Request A Dollar

Pull your contract packet or log into the insurer portal and look for these items. If you can’t find them, call the insurer and ask for the page references. Get the answers in writing or in a portal message if possible.

Surrender schedule and “free” withdrawal limit

Find the surrender charge table. Then locate any annual free-withdrawal provision. Many people can meet a short-term cash need by staying inside that allowance and avoiding the biggest fee.

Loan provisions, if any

Search for words like “loan,” “policy loan,” or “contract loan.” If it exists, note:

• Maximum loan percentage or dollar limit
• Interest rate and how it changes
• Repayment rules and what happens if you stop paying
• Impact on death benefit, income base, or guaranteed values

Rider rules tied to withdrawals

If you have a guaranteed income rider, a withdrawal can reduce the payout base or trigger a permanent step-down. The rider section will spell out the math. It’s rarely friendly to early cash-outs.

Tax withholding options

Insurers often offer federal withholding on distributions. Withholding can help you avoid a nasty bill later, yet it also reduces the cash you receive right now. Decide on purpose, not by default.

Table Of Common Ways To Access Annuity Money

The table below helps you compare the most common cash-access routes. Exact terms vary by product and insurer, so treat it as a decision aid, then match it to your contract pages.

Cash-access move	What it is	Typical trade-offs
Contract loan (if offered)	Insurer lends cash using your value as collateral	Interest cost; unpaid balance can reduce benefits; tax trouble if contract terminates with a loan outstanding
Free-withdrawal amount	Limited yearly withdrawal that may avoid surrender charges	Still may be taxable; can reduce rider values if you exceed limits
Partial withdrawal	Cash distribution without ending the contract	Surrender charge may apply to part; taxable earnings; possible early distribution tax under 59½
Full surrender	End the contract and take the net value	Largest surrender charge risk; possible market value adjustment; taxable earnings; may lose guarantees
Systematic withdrawals	Recurring withdrawals on a schedule	Can collide with surrender rules; can drain value faster than expected; tax applies on taxable portion
Annuitization	Convert value into an income stream per contract terms	Less flexibility; changing the choice later may be hard or impossible depending on options chosen
1035 exchange (nonqualified)	Move value to another annuity without current tax on deferred earnings when done correctly	No cash in hand; new surrender period may start; fees and features reset
Hardship rules (plan-based annuities)	Distribution allowed under plan rules for certain needs	Plan limits apply; taxable; extra tax may apply under 59½; paperwork can be strict

How To Make The Call Without Regret Later

This is the part people skip. They see “cash value” and move fast. A calmer approach can save real money.

Step 1: Write down the reason and the exact dollar need

Be precise. “I need $8,000 for a repair by March 1” beats “I want some money.” The annuity may have a free-withdrawal cap that covers the need without surrender charges.

Step 2: Ask the insurer for a net-dollar quote

Request a quote that shows:

• Gross amount requested
• Surrender charge amount, if any
• Any market value adjustment
• Any rider impact summary, if they can provide it
• Withholding you elect
• Net amount you’ll receive

Don’t accept “it depends” on fees. The insurer can calculate the fee schedule tied to your contract date.

Step 3: Map the tax angle before you pull the trigger

If your annuity is nonqualified, withdrawals typically tap earnings first until earnings are exhausted. That can mean a bigger tax hit than you expect. If your annuity sits inside an IRA or plan, the distribution is often taxable as ordinary income under the plan’s rules. IRS guidance on pension and annuity income helps you frame what gets reported and how: Publication 575.

If you’re under 59½, check whether the extra 10% tax could apply to the taxable part of the distribution. The IRS summary page is a clean starting point: Topic No. 410.

Step 4: Check what you’d be giving up

Some annuities were purchased for a reason: income guarantees, death benefits, or principal protection. A withdrawal can weaken those features. If you have a living benefit rider, read the rider rules twice and note the exact withdrawal thresholds that trigger reductions.

Table To Pressure-Test A Withdrawal Before You Submit Forms

Use this checklist-style table as a quick filter. If you hit several “Yes” answers, slow down and get clarity from the insurer or a licensed professional who can review your contract pages.

Question to answer	Yes means	What to do next
Am I still in the surrender period?	A fee may apply to amounts over the free-withdrawal limit	Ask for a net-dollar quote showing the surrender charge
Is my needed cash within the free-withdrawal limit?	You may avoid the biggest contract fee	Confirm the limit and how it’s calculated for this contract year
Do I have an income rider or similar benefit feature?	Withdrawals can reduce future payouts	Request a rider impact illustration before withdrawing
Am I under age 59½?	An extra 10% tax may apply to taxable amounts	Check IRS rules for early distributions and exceptions that fit your case
Is this annuity inside an IRA or employer plan?	Plan distribution rules can restrict timing and amounts	Review plan rules and distribution paperwork before requesting funds
Is a loan feature even available on my policy?	You may have a loan route instead of a withdrawal	Confirm loan limits, interest rate, and the effect of nonpayment
Do I need the annuity’s guarantees to cover near-term income?	Cash-out can weaken the original purpose	Run a simple budget and see if a smaller withdrawal solves the gap

Common Mistakes That Cost The Most

Calling it a loan when it’s a distribution

If the contract doesn’t offer policy loans, you’re not borrowing. You’re withdrawing. That changes taxes, fees, and the way the insurer treats the contract going forward.

Taking more than the free-withdrawal allowance

Many owners can solve a short-term need by staying inside the annual free-withdrawal limit. Going past it can trigger surrender charges that are hard to justify for a short cash gap.

Ignoring surrender-charge timing by a few months

Surrender charges often decline year by year. If you’re near the next contract anniversary, waiting can reduce the fee. Ask the insurer for the schedule tied to your exact dates.

Forgetting rider math

Rider benefits can be touchy. A single withdrawal can lock in a lower income base. If the annuity is meant to pay income later, this is the place where “small” choices can sting.

A Practical Way To Decide In One Sitting

If you want a quick decision path without guesswork, run this three-part test:

1. Cash test: Is the needed amount within the free-withdrawal limit? If yes, the contract fee may be low or zero.
2. Tax test: Will the distribution be taxable, and are you under 59½? If yes, estimate the tax plus any extra tax and compare it to other funding options.
3. Purpose test: Was this annuity bought for future income or a guarantee you still rely on? If yes, check rider impact before touching the balance.

If you’re stuck after those three tests, get a written illustration from the insurer: “If I withdraw $X today, what happens to my account value, my rider base, and any guaranteed income?” Clear numbers beat guesses every time.