Is there a penalty for withdrawing from an annuity?

Most annuities charge surrender fees. These are basically deferred sales fees that are charged when you sell, rather than when you buy the investment. There are a few vendors that offer annuities with minimal or no surrender fees. More typically, annuities have a surrender schedule that lasts six or seven years. The fee may start at about 6% or 7% initially, then decrease each year until it reaches zero. Some have much higher fees and/or longer terms. 

For example, suppose there is an annuity with a surrender schedule that starts at 7% in year one and drops to 6% in year two. An individual with $25,000 in the contract who decides to surrender the annuity in year two would pay 6% x $25,000, or $1500 just to cancel the contract.

There also may be tax consequences. Withdrawals taken before age 59½ may be subject to a 10 percent IRS penalty tax unless an exception applies. When you make a withdrawal from an annuity, the IRS assumes that earnings are withdrawn first. The 10% penalty applies to the earnings portion of a withdrawal. So, early withdrawals are costly from a tax standpoint.

Annuities contain fees and charges including, but not limited to mortality and expense risk charges, sales and surrender (early withdrawal) charges, administrative fees and charges for optional benefits and riders. Variable annuities (as opposed to foxed annuities) are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity, or from your financial professional. Read the prospectus carefully before you invest.

There are frequently penalties and/or fees if you withdraw from an annuity before the surrender period is satisfied. @JeffRossi nailed it.

I just want to add that many deferred annuities have an option during the surrender period for a “penalty free” withdrawal. You’ll need to review your specific contract, but it is not uncommon for annuities to provide a 10% penalty free withdrawal each year. These are just “penalty free” from the annuity company, you could still be responsible for taxes and IRS early withdrawal (under 59 ½) penalties.