Yes — but only in specific situations, and the word “penalty” is hiding two completely different things. One is the surrender charge, which belongs to the insurance company and is written into your contract. The other is the IRS 10% additional tax on early distributions, which applies to the taxable part of money taken out before age 59½ (IRS Topic no. 558).
They run on separate clocks. You can owe one and not the other, both, or neither, and almost every unhappy surprise in this area comes from someone answering the question with only one of them in mind.
The two penalties, side by side
Sorting these out first makes the rest of the article straightforward.
| Surrender charge | IRS additional tax | |
|---|---|---|
| Who imposes it | The insurance company | The federal government |
| What it’s based on | Your contract’s surrender schedule | Your age at the time of the distribution |
| When it stops | At the end of the surrender period — in Florida, no later than the 10th policy year for a contract issued at 65 or older (Fla. Stat. § 627.4554(9)) | When you reach age 59½ (IRS Topic no. 558) |
| How much | Set by the contract; capped in Florida at 10% of the amount withdrawn for senior-issued contracts | 10% of the portion of the distribution includible in gross income |
| Can it be waived | Sometimes — free withdrawals and contract waivers, which vary by carrier and state | Only through the exceptions the IRS lists |
A 62-year-old who cashes out a contract bought two years ago owes a surrender charge and no IRS penalty. A 55-year-old who takes money out of a contract whose surrender period ended owes the IRS penalty and no surrender charge. Both are common, and neither person is doing anything unusual.
What is a “free withdrawal” and how much is it?
Most deferred annuities include a free-withdrawal provision: a percentage of the contract value you can take out each contract year without triggering a surrender charge. That percentage is a term of your specific annuity. It is not set by statute, it is not standard across carriers, and it is one of the handful of provisions genuinely worth reading before you buy rather than after.
What to look for in your own contract:
- The percentage and whether it is measured against the contract value or the premium paid.
- Whether unused amounts carry over to the next year. In many contracts they do not.
- Whether the first contract year is excluded. Some products do not allow a free withdrawal until year two.
- Whether a market value adjustment applies on top of the surrender charge. An MVA can move the payout in either direction depending on where interest rates have gone since you bought the contract, and it is a separate mechanic from the surrender charge.
None of that is knowable from the outside. If you are holding a contract and cannot find the provision, the annual statement and the contract’s schedule page are where it lives, and the issuing carrier is required to be able to tell you.
Withdrawal, surrender, or annuitization — three different questions
“Taking money out” covers three transactions that behave differently, and people often ask about one while meaning another.
| What it is | Surrender charge | Effect on the contract | |
|---|---|---|---|
| Free withdrawal | Taking the amount your contract allows each year | None, by definition | Contract continues; value reduced |
| Partial withdrawal above the free amount | Taking more than the annual allowance | Applies to the excess, on the current schedule | Contract continues; value reduced |
| Full surrender | Cashing out the whole contract | Applies to the full amount still in the surrender period | Contract ends |
| Annuitization | Converting the value into a stream of income payments | Generally not applicable — nothing is being surrendered | Contract converts; usually irreversible |
The middle two rows are where the arithmetic matters. A surrender charge on a partial withdrawal normally applies only to the amount above the free-withdrawal allowance, not to the entire withdrawal — so taking the allowance plus a little is a very different cost from taking the allowance plus a lot. Confirm that in your own contract, because the language varies.
Full surrender is also the point at which any market value adjustment does its largest work, and where the entire remaining gain becomes taxable in a single year. Both of those push in the same direction: a full surrender is the most expensive version of this transaction almost every time, and it is worth being sure that is what you actually need.
What Florida law caps — and what it doesn’t
This is where the answer genuinely changes depending on where you live, and Florida’s rules are more protective than most.
A cap on the surrender charge itself. Under Fla. Stat. § 627.4554(9), an annuity contract issued to a senior consumer age 65 or older “may not contain a surrender or deferred sales charge for a withdrawal of money from an annuity exceeding 10 percent of the amount withdrawn.” The same subsection requires the charge to be reduced “so that no surrender or deferred sales charge exists after the end of the 10th policy year or 10 years after the date of each premium payment if multiple premiums are paid, whichever is later.”
Two limits in one sentence, then: a ceiling on the percentage and a hard end date. The subsection does not apply to annuities purchased by an accredited investor as defined in SEC Regulation D, nor to the employer-plan and structured-settlement contracts listed in paragraph (4)(b) of the same section.
A 21-day window to undo the purchase. Separately, Fla. Stat. § 626.99(4)(b) requires that fixed and variable annuity contracts provide an unconditional refund for at least 21 days. For a fixed annuity that is a refund of premiums paid, including any contract fees or charges; for a variable or market-value contract the refunded amount can differ from the deposit because of market movement during the period. Paragraph (4)(c) requires the insurer to attach a cover page telling the purchaser the refund period exists, along with the company’s contact information and the Department of Financial Services’ toll-free help line.
That 21-day window is the single cleanest way to take money out of an annuity with no penalty of any kind — and it is also the shortest. It closes three weeks after delivery.
What Florida does not do: it does not set your free-withdrawal percentage, it does not cap surrender charges on contracts issued before 65, and it does nothing at all about the federal tax. The IRS rules below apply in Florida exactly as they apply everywhere else.
When does the IRS 10% additional tax apply?
Generally, early distributions are those received from a qualified retirement plan or deferred annuity contract before reaching age 59½, and the additional tax is equal to 10% of the portion of the distribution that is includible in gross income (IRS Topic no. 558). Note what that is measured on: the taxable portion, not the whole check.
The IRS lists a set of exceptions. Several of them come up in real retirement situations rather than edge cases:
- Distributions made as part of a series of substantially equal periodic payments over your life expectancy.
- Distributions after you become totally and permanently disabled.
- Distributions made on or after the death of the contract holder.
- Distributions after a physician has certified that you are terminally ill.
- Distributions for unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
- Distributions in connection with a federally declared disaster — relevant more often in Florida than in most states.
- Personal or family emergency expense distributions, available for distributions made after December 31, 2023, if the requirements are met.
The full list runs longer, and each exception has its own conditions. It is worth reading the IRS page itself before assuming a situation fits one, because the exceptions are narrower than their one-word summaries suggest.
Penalty-free is not tax-free
This is the part that catches people who did everything right on the penalty question.
Avoiding the surrender charge and clearing age 59½ means no penalties. It does not mean the withdrawal is free of income tax, and the ordering rule makes the first dollars out the worst ones.
For a non-qualified deferred annuity — one bought with money you had already paid tax on — a withdrawal taken before the annuity starting date is allocated first to earnings and then to your cost (IRS Publication 575). Earnings come out first, so a $40,000 withdrawal from a contract holding $60,000 of gain is $40,000 of ordinary income, not a proportional slice of gain and principal.
For a qualified annuity — one funded inside an IRA, 401(k) or similar — the distribution is generally taxable in full, because none of the money in it has been taxed yet.
There is one more wrinkle, and it explains why two people can take the same amount out of similar contracts and report very different income. The earnings-first rule applies to withdrawals taken before the annuity starting date — that is, while the contract is still in its accumulation stage. Once a non-qualified contract has been annuitized, each payment is split instead: part is excluded from income as a return of your cost until your entire cost has been recovered, after which payments are fully taxable (IRS Topic no. 410). Same contract, same money, two completely different tax treatments depending on which side of that line the payment falls.
That is the honest answer to “how much of this is taxable”: it depends on how the contract was funded and whether you have annuitized it, and both facts are knowable from your own paperwork.
And that taxable amount does not stop at your tax return. It lands in modified adjusted gross income, which is what Social Security uses to set Medicare premiums two years later (SSA.gov). A large withdrawal at 63 can raise the Part B and Part D premiums you pay at 65, in a year when your income is back to normal. That is not a penalty in any technical sense, and it can still cost more than the surrender charge you were avoiding. Our post on whether annuity income counts toward IRMAA works through the mechanics, and the IRMAA calculator will show you which bracket a given MAGI lands in before you take the money rather than after.
Waivers written into the contract
Beyond the free withdrawal, many deferred annuities include waivers that let you access more than the annual percentage without a surrender charge when something specific happens. Commonly offered ones include confinement to a nursing home or extended care facility, a terminal illness diagnosis, and disability.
Three cautions, all of which matter:
- These are contract provisions, not law. Availability and terms vary by carrier and by state, and a waiver in one product may not exist in another from the same company.
- They usually have waiting periods and definitions. A nursing home waiver often requires a confinement of a minimum length and may not apply if the confinement began in the first contract year.
- A waived surrender charge is still a taxable distribution. The contract waiver does nothing about the IRS side.
Annuitizing — converting the contract into a stream of income payments — is the other route out, and it changes the question entirely rather than answering it. Annuitization generally ends the surrender charge issue because you are no longer surrendering anything, and it is usually irreversible. Whether that trade is right depends on whether you wanted the money or wanted the income.
How to take money out without tripping either penalty
Working in this order tends to keep both penalties off the table:
- Find your contract’s free-withdrawal percentage and how much of this contract year’s allowance you have already used.
- Check where you are in the surrender schedule. If the surrender period ends in eight months and the need is not urgent, waiting is the whole strategy.
- Confirm your age against 59½, and if you are under it, check the IRS exception list before assuming the 10% applies.
- Estimate the tax, not just the penalty. Earnings-first ordering on a non-qualified contract means the taxable number is usually larger than people expect.
- Check the two-year Medicare lookback if you are 62 or older, because that is the cost nobody budgets for.
- Ask whether a partial withdrawal across two tax years does the same job as one large withdrawal in a single year. Often it does, and for less.
Steps 4 through 6 are where a conversation with your tax professional belongs. Nothing here is tax advice, and the right answer genuinely depends on numbers that are specific to you.
A note for Florida readers approaching 65
If you are buying an annuity in Florida at or after 65, the § 627.4554(9) protections attach to that contract — the 10% ceiling on the charge and the hard stop at the 10th policy year. If you are buying at 63 or 64, they do not, and the surrender schedule is whatever the contract says it is. That difference is worth knowing before you sign rather than after, and it is one of the few places where a two-year difference in purchase date changes your legal position rather than just your pricing.
It also sits next to a decision that arrives at the same age. Retirement income timing and Medicare premium timing are the same conversation in Florida as anywhere else, and the two-year IRMAA lookback means a withdrawal made at 63 shows up on the premium notice at 65. If you are also weighing how a contract behaves in a down year, our post on whether you can lose money in a fixed indexed annuity covers the other side of the same product, and the IRMAA guide explains the surcharge itself.
If you are holding an annuity and trying to work out what a withdrawal would actually cost you — the charge, the tax, and the Medicare effect two years out — that is a conversation worth having before the money moves. Book a time with Virginia and bring the contract; the answer is usually in the schedule page.