Updated July 30, 2026. Quick answer: The question is almost never “are annuities good.” You already own one. The real question is what leaving costs, and it has two halves: a contractual half in your policy documents, and a statutory half that is the same for everyone and that most exit conversations skip. The statutory half is usually the bigger surprise, because the taxable money comes out first.
Five statutory facts, before any decision
| The fact | Provision | Why it changes the decision |
|---|---|---|
| Withdrawals come out of gain before basis | §72(e)(2)(B), (e)(3) | A partial withdrawal is not partly tax-free. It is fully taxable until the gain is exhausted |
| A separate 10 percent penalty before 59½ | §72(q) | It applies to the includible portion — which is the same money that comes out first |
| You can move to a different contract without recognising gain | §1035(a)(3) | Exit and surrender are not the same act. One is taxable, one need not be |
| Borrowing or pledging is a distribution | §72(e)(4)(A) | Using it as collateral is taxable before any cash reaches you |
| Death of the owner forces distribution | §72(s) | Whatever you decide has an end date you did not choose |
The half of this decision that is not in the Code. The tax treatment below is statutory and applies to everyone. What it costs you to leave is contractual: the surrender-charge schedule and where you sit in it, any guaranteed withdrawal or income rider and what it is actually worth, and the death benefit. Those live in your contract and the annual statement, not in the law, and this site does not guess at them. Ask the issuer in writing for the current surrender value, the remaining surrender period, and the value of every rider — then the statutory side below tells you what the tax does to whatever is left.
The order that saves the most money
First establish what kind of annuity you hold, because it decides which rules even apply. A non-qualified annuity was bought with after-tax money outside a retirement plan; those are the pages above. An annuity held inside an IRA or a qualified plan is governed by different provisions — there is no separate investment in the contract to allocate against, and the early-distribution rule is §72(t) rather than §72(q).
Then get the contract facts in writing from the issuer. Then read the statutory side. Only then is there a decision, and it is usually not binary: exchanging into a different contract sits between keeping and surrendering, and it is the option people most often do not know they have — though it does not reset the thing most people hope it resets.
A note on who is telling you what. Most annuities are sold by someone paid a commission to sell them, and much of the “get out now” content is published by firms paid to manage the proceeds. Both have a position. The provisions quoted across these pages do not — they say the same thing whichever way you decide, which is why every page here quotes the statute rather than characterising it.
If the annuity is one you inherited rather than bought, the questions are different: see an annuity held inside an inherited IRA.
Sources
IRC §§72(e), 72(q), 72(s), 72(u) and 1035, each quoted verbatim on the linked page that turns on it. Retrieved from the United States Code, July 2026.
This states what the cited authority says about a non-qualified annuity — one bought with after-tax money outside a retirement plan — unless a page says otherwise. It is not tax, legal or investment advice. An annuity held inside an IRA or a qualified plan is governed by different provisions. This site states no surrender-charge schedule and no rider value, because both are terms of your particular contract rather than rules of law.