How to Get Out of an Annuity When It Is in an IRA

Having an annuity inside an IRA can feel like buying an “extended warranty” for a toaster you don’t even own. Sometimes it’s helpful. Sometimes it’s expensive. And sometimes you’re just ready to move on. The good news: you can usually exit or transfer an IRA annuity. The trick is doing it in a way that avoids accidental taxable distributions while minimizing contract fees.

Quick Definitions (So We Don’t Trip Over Vocabulary)

• IRA annuity: An annuity contract held inside a traditional, Roth, SEP, or SIMPLE IRA.
• Surrender charge: A contract fee for withdrawing or transferring during the “surrender period.”
• Market Value Adjustment (MVA): A feature (common in some fixed annuities) that can raise or lower your surrender value when interest rates change.
• Trustee-to-trustee transfer: Money moves directly between IRA custodians (you never take possession).
• Rollover (60-day rule): You receive the funds, then redeposit to an IRA within 60 days (riskier).

Step 1: Figure Out What You Own (Because “Annuity” Is Not One Thing)

Before you do anything dramatic (or mildly dramatic), request a current surrender/transfer quote from the insurer. Not a brochure. Not a guess. A quote. You want these details in writing:

• Type: fixed, fixed indexed, or variable annuity
• Years left in the surrender period and today’s surrender charge %
• Free-withdrawal amount (often a % you can move annually without surrender charges)
• MVA impact (if your contract has one)
• Riders/guarantees you might lose (income rider, enhanced death benefit, bonus recapture, etc.)
• How the IRA is titled (who the custodian is, and how checks must be made payable)

Where the annuity is held matters

Some IRA annuities are custodied directly at the insurance company. Others are held on an annuity platform through a brokerage or bank. That changes your options:

• In-kind transfer: sometimes you can transfer the annuity contract as-is to a new custodian that supports it.
• Liquidate then transfer: sometimes you must surrender to cash inside the IRA first, then transfer the cash to the new IRA.

If your receiving custodian can’t hold the contract, surrender-to-cash may be the only practical route.

Step 2: Separate Contract Fees From IRS Rules

Two different “penalties” get mixed up all the time:

• Contract costs (surrender charges, MVA, rider fees, and for many variable annuities, ongoing M&E/administrative costs)
• IRA/tax consequences (taxable income from traditional IRAs when you withdraw to a non-IRA account, possible 10% early-distribution penalty if you’re under 59½, and required minimum distributions once you hit the required age)

Big takeaway: A correct IRA-to-IRA transfer usually avoids taxes. But it won’t magically delete surrender charges.

A super-common confusion: “I surrendered the annuity” vs “I withdrew from the IRA”

You can surrender the annuity inside the IRA (turning it into cash that stays in the IRA) without creating a taxable event by itself. Taxes generally happen when money leaves the IRA wrapper to a taxable account. So the goal is often: exit the annuity, keep the IRA.

Step 3: Choose Your Exit Path

Option A: “Exit” by changing the annuity’s settings

If your main complaint is performance or risk, you might not need a full exit today.

• Variable annuity: rebalance subaccounts, reduce equity exposure, or remove optional riders (if allowed).
• Indexed annuity: adjust crediting strategies at renewal windows (contract-dependent).
• Any annuity: ask whether a lower-cost version of the contract is available on that platform.

This approach can buy time if surrender charges are still steep.

Option B: Use the free-withdrawal amount to unwind gradually

Many contracts allow a limited annual withdrawal without surrender charges. In an IRA, you can often move that amount to a different IRA investment (still inside the IRA wrapper) rather than taking it as taxable cash.

Example: Your IRA annuity is $180,000, surrender charge is 6%, but you have a 10% free-withdrawal feature. Moving $18,000 per year to a low-cost IRA portfolio can reduce the annuity position without paying the full surrender charge up front.

Option C: Full surrender and transfer the cash to another IRA

This is the “clean break” option: surrender the annuity, then move the remaining IRA cash to a new custodian (or into different investments at the same custodian).

When it can be worth it: you’re out of the surrender period (or close), the annuity’s ongoing costs are high, or the product no longer fits your plan.

Option D: Transfer to another IRA annuity (if you still want annuity features)

People often ask about a “1035 exchange.” That’s mainly for non-qualified annuities outside retirement accounts. For an annuity inside an IRA, the typical equivalent is a direct IRA-to-IRA transfer into another annuity that’s also held inside an IRA.

Watch out for the classic trap: you escape one surrender schedule… by starting a fresh one.

Step 4: Move It the Right Way (So You Don’t Accidentally Create a Distribution)

Best method: trustee-to-trustee transfer

A direct transfer moves the IRA from the insurer/custodian to the new IRA custodian without being paid to you. This helps avoid withholding and the stress of a 60-day deadline.

Riskier method: 60-day rollover

If the check is payable to you, the clock starts. You generally have 60 days to redeposit into an IRA. If taxes are withheld, you may need to replace the withheld amount with other funds to complete a full rollover.

Questions to ask before you sign anything

• Will this move trigger any surrender charge, MVA, or bonus recapture?
• Do I lose any rider benefits if I partially withdraw or fully surrender?
• Can the receiving IRA custodian accept the annuity contract, or must it be liquidated to cash first?
• How will any check be titled so it’s not treated as payable to me?
• If I’m in an RMD year, who will calculate it and how will it be paid?

Transfer checklist

• Confirm the receiving IRA custodian can accept the transfer (and any annuity paperwork, if applicable).
• Request a surrender/transfer quote showing surrender charges and any MVA impact.
• Make sure any check is payable to the new custodian FBO you (not payable to you personally).
• Keep copies of forms and confirmations for your tax records.

Step 5: Special Situations You Need to Handle Carefully

Required Minimum Distributions (RMDs)

As of 2026, the IRS “required beginning date” for most IRA owners is tied to reaching age 73 (with the starting age scheduled to increase to 75 in 2033). If you’re in a traditional IRA and you’ve reached the RMD age, you must take required withdrawals each year. You can delay your first RMD until April 1 of the following year, but that can mean two RMDs in one calendar year.

Also, RMD amounts generally can’t be rolled overso coordinate the RMD before or alongside an IRA annuity transfer.

Roth IRA annuity

A Roth IRA doesn’t have lifetime RMDs for the original owner, but you still want to keep transfers inside Roth accounts to avoid non-qualified withdrawals. Contract fees (surrender charges, MVAs) can still apply.

Fixed annuities with Market Value Adjustments (MVA)

With some fixed annuities, interest-rate changes can cause an MVA that increases or decreases the cash value if you exit early. Translation: your statement balance may not equal your surrender value. Always request an updated quote.

Riders and guarantees

If your annuity has an income rider or enhanced benefits, surrendering may reduce or erase them. Before exiting, ask the insurer for an “in-force illustration” or benefits summary and compare it to what you’d gain by switching to lower-cost IRA investing.

The “free look” window

Some variable annuity contracts have a short “free look” period (often 10 or more days, depending on state and contract) where you can cancel without surrender charges. If your purchase was recent, check your contract immediatelythis is one of the rare times procrastination is a financial villain.

Is Paying the Surrender Charge Worth It? A Simple Break-Even Test

Do quick math before you make a move:

• Exit cost: surrender charge (and any MVA/bonus recapture)
• Annual cost difference: annuity fees you’d avoid by moving to a lower-cost IRA setup
• Break-even: exit cost ÷ annual savings

Example: A $160,000 annuity with a 4% surrender charge costs $6,400 to exit. If moving to a low-cost IRA portfolio saves about 1% per year in total costs, that’s roughly $1,600/year. Break-even is about 4 years. If you’ll stay invested longer than that, paying the fee may be worth it.

Common Mistakes to Avoid

• Turning an IRA transfer into “cash in your checking account”: that’s usually a taxable distribution.
• Starting a 60-day rollover you can’t finish: direct transfers are usually safer.
• Jumping into a new annuity without comparing all-in costs: new surrender schedule + rider fees can be a bad sequel.
• Forgetting to ask for a surrender quote: guessing your exit value is like budgeting with vibes.

Conclusion

To get out of an annuity inside an IRA, start with facts: surrender charges, free-withdrawal options, MVAs, and any valuable riders. Then choose an exit pathgradual withdrawals, a full surrender, or a direct transfer to another IRA (or IRA annuity). Finally, execute with clean IRA mechanics (ideally a trustee-to-trustee transfer) and coordinate RMDs if they apply. This article is educational, not individualized tax or legal advicewhen the contract is complex or the dollar amounts are large, a qualified fiduciary advisor or tax professional can help you read the fine print and avoid expensive mistakes. In other words: aim for “transfer complete,” not “why is there withholding?”

Experiences Related to Getting Out of an IRA Annuity (About )

In real life, people rarely decide to exit an IRA annuity because they woke up craving paperwork. It’s usually a slow build: the annual statement arrives, the fee lines start looking like a grocery receipt, and someone finally asks, “Wait… what am I paying for?” Here are a few common experiences that come up again and again.

1) The “I assumed surrender charges were taxes” moment

Many investors are relieved to learn that an IRA-to-IRA transfer itself usually isn’t taxableonly to discover the contract still charges a surrender fee. A common story: someone requests a transfer expecting a clean move, then gets a quote showing 5–7% coming off the top. The lesson is boring but powerful: always ask for a current surrender quote before you make a plan, and ask whether a partial “free withdrawal” can reduce the hit.

2) The “statement balance vs. surrender value” surprise

With certain fixed annuities, an MVA or bonus recapture can change what you receive if you exit early. People often say, “But my statement shows $X!”and the surrender quote shows less. The practical takeaway is to time exits around contract anniversaries or renewal windows when possible, and to get the exit value in writing so you’re not guessing.

3) The “transfer got stuck in limbo” headache

A transfer can stall because the receiving IRA custodian can’t hold that specific annuity contract, or because the insurer requires extra signatures and forms. People describe weeks of back-and-forth where the money feels like it’s traveling by carrier pigeon. The fix is prevention: confirm the receiving custodian can accept the transfer and ask for a checklist of required documents up front (not after week three).

4) The “new annuity, new surrender period” trap

Some folks exit one annuity by switching into another because someone promises “better features.” Later, they realize the new contract restarted the surrender schedule and added rider fees they didn’t truly need. The lesson: compare all-in costs (base fees + riders + underlying investments), and be honest about how long you’d keep it. If it’s “maybe a couple years,” a long surrender period is a mismatch.

Bottom line: Most frustrations come from surprisesfees, timing, and paperwork. A surrender quote, a clear transfer method, and a quick check for special rules (like RMDs) can turn the “how do I get out of this?” problem into a manageable checklist.