Most deferred annuities allow you to withdraw up to 10% of the account value (or premium paid) annually without incurring a surrender charge. This provides liquidity for emergencies. For example, on a $100,000 contract, you could withdraw $10,000 penalty-free in year 3, even if the surrender charge is 7%. Note that if you are under 59½, the IRS 10% penalty may still apply to the taxable gain.

For annuities purchased with after-tax money, a portion of each income payment is considered a tax-free return of principal. The "Exclusion Ratio" is calculated by dividing your original investment by the expected total payout (based on life expectancy). If you invested $100,000 and are expected to receive $150,000 over your life, roughly 66% of each check is tax-free; only the remaining 33% is taxable income.

If you are still working at age 73 (the RMD age for 2026) and do not own more than 5% of the company, you can generally delay taking Required Minimum Distributions (RMDs) from your current employer's 401(k) plan until you retire. This exception does not apply to IRAs. This makes keeping funds in a work-based annuity advantageous for those working into their late 70s.

Yes. Instead of irrevocably annuitizing (trading the lump sum for a paycheck), you can elect "Systematic Withdrawals." This allows you to tell the insurer to send a specific dollar amount (e.g., $2,000) or percentage monthly. You retain control of the remaining cash value, but unlike annuitization, there is a risk of depleting the account to zero if you withdraw too aggressively.

Withdrawals before age 59½ generally trigger two penalties:

1. Surrender Charges: Imposed by the insurer if within the contract's early years (e.g., 7% fee).
2. IRS Tax Penalty: A 10% federal excise tax on the gain (interest) withdrawn, in addition to ordinary income tax.Exception: You can avoid the IRS penalty using a "72(t)" distribution schedule, which requires taking substantially equal periodic payments for at least 5 years.

Non-qualified deferred annuities follow LIFO accounting rules. This means the first money you withdraw is considered to be the interest (gain), which is fully taxable. You do not touch your tax-free principal until all gains have been withdrawn. This contrasts with other investments where you might sell specific tax lots.