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What Is an Annuity Cash out?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2016
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    Conjecture Corporation
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An annuity cash out is a type of financial transaction that involves choosing to receive the total value of the annuity in a lump sum rather than in a series of payments over a period of time. This approach is sometimes used with structured settlements, an inheritance, payouts from an insurance policy, or even with the process of withdrawing all the proceeds from a retirement plan at one time. While this type of transaction may be viable in certain situations, going with an annuity cash out can present certain difficulties, especially in terms of taxation.

One of the main benefits of an annuity is the ability to enjoy a steady stream of income over a period of time. Typically, the assets underlying the annuity continue to generate revenue that helps to fuel that income stream. As long as those assets are performing well, the investment in the annuity is likely to be safe and allow the recipient or beneficiary to receive those benefits for a number of years. Should those assets suddenly lose value and threaten to undermine the income stream, choosing an annuity cash out may be a logical solution, since the proceeds from the cash out could be placed into some other type of plan that shows more promise of generating an ongoing income.

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There are other situations that may trigger the need to consider an annuity cash out. Financial hardship on the part of the recipient may require the liquidation of a few assets, including an annuity program. While this method does eliminate a source of future income, the measure may be necessary to take care of immediate needs that cannot be managed in any other manner. Typically, financial advisors will urge individuals to explore all other options for managing pressing debts before settling on an annuity cash out.

Along with eliminating a source of future income, the annuity cash out may also present some potential issues that should be considered before the cash out is ever initiated. Tax liability is one example. Before choosing to cash out an annuity, it is important to determine what that lump sum payout would do in terms of affecting the taxes owed for the current tax period. In some cases, the strategy would effectively move the recipient into a higher tax bracket, creating a larger tax debt. This can often be avoided by arranging to reinvest the payout in another plan that allows the deferment of taxes until withdrawals are made.

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