Don’t Automatically Annuitize an Annuity – Shop Around First
Converting a deferred annuity to a lifetime income annuity can be a great move, but it pays to shop the market instead of routinely annuitizing with the same company.

If you’ve saved up a lot of money in an annuity, you’re in a fine position for a financially secure retirement. Once you are retired, what’s the best way to get your money out of your annuity?
All cash-value-type annuities, whether fixed-rate, fixed-indexed or variable, are tax-deferred until you take money out. If you’ve owned an annuity for many years, you probably have significant untaxed gain built up. It’s a good problem to have.
If you cash in and surrender your annuity, you’ll pay income tax on the gain all in one year, and that may bump you into a higher tax bracket. By taking out your money gradually, you can spread the taxation of that gain out over many years and avoid paying a higher tax rate — and also get a guaranteed lifetime income. That’s where annuitization comes in.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Securing a lifetime income
“Annuitizing” means converting the money in an existing deferred annuity into a guaranteed income stream. You turn over the money in the annuity to the issuing insurance company in exchange for guaranteed future income. This is commonly called an income annuity. Annuitization is irrevocable: You’ll no longer have access to your funds or the ability to withdraw them.
While you may choose an income annuity that pays out over a set term, such as 15 years, most people choose a lifetime income annuity. This option gives you a guaranteed monthly payout for as long as you live. Each payment includes both taxable income and nontaxable return of principal.
Even after the insurer has repaid the entire principal you deposited, you’ll still get the same income. A lifetime income annuity thus offers longevity insurance. It protects you from the financial risk of living to a very old age.
If you’re married, you can choose a joint-life payout so that a surviving spouse will continue to receive the same income after his or her spouse has died. Cash refund is also a popular option that guarantees that your premium payment will not be lost if you (or both spouses) die before the full amount of your annuity purchase has been paid back. If that happens, your named beneficiary will receive the difference.
Comparison shopping often beats annuitizing
Annuitization technically means you use the same insurance company that issued your existing annuity. That’s fine if your current insurer offers the best deal around.
But it probably doesn’t. The annuity industry is very competitive and constantly changing.
Before annuitizing, always get competitive annuity quotes to determine if other insurance companies will pay more income. Ask an annuity agent who represents multiple insurers to shop the market for you.
Here’s an example, with rates current as of mid-June 2021. A 70-year-old couple with a $250,000 annuity decides to convert it into a joint lifetime income annuity (meaning once one spouse dies, the payments continue throughout the lifetime of the other spouse). If they annuitize with their current insurer, they’ll get $1,123.43 a month for life. However, if they shop around, they can find another insurer that will pay $1,177.35 a month, and that’s $647.04 more each year.
Avoid unnecessary taxes and fees
If another insurer offers a better deal, your agent can arrange for a “1035 exchange” to the new insurance company. Such a transfer is tax-free, because the funds go directly from one annuity company to another.
The new insurer will use your money to set up a single-premium immediate income annuity — called an immediate annuity for short. Though this isn’t technically considered annuitization, it amounts to the same thing. The only difference is that you’re changing companies. You exchange your existing annuity’s accumulation value for a guaranteed income that starts immediately.
Unlike life insurance, annuities aren’t subject to underwriting. So, there’s just one potential roadblock to a 1035 exchange. Most annuities levy a surrender charge if you cash in the annuity during the surrender period. For example, a five-year fixed-rate annuity would usually have a declining surrender fee if you cancel the contract or remove more than the penalty-free amount of money before the five years are up.
To avoid paying that fee, you can wait until the surrender period is over to make your exchange. If you can’t wait, ask your annuity company if it will waive surrender charges when you annuitize with it. If it will do that, that’s great. But you won’t get the advantage of comparison shopping.
A free quote comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling 800-239-0356.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. Interest rates from dozens of insurers are constantly updated on its website. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Ore., based company at www.annuityadvantage.com or (800) 239-0356.
-
Ask the Editor: Four Reader Tax Questions
Ask the Editor In our new Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions related to filing of tax returns and paying taxes.
By Joy Taylor Published
-
These Eight States Have the Most Expensive Home Insurance in 2025
If you live in one of these eight states, you’re probably paying $1,000 or more above the national average for home insurance.
By Rachael Green Published
-
Retiring With a Pension? Four Things to Know
The road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
How to Teach Your Kids About the Tax Facts of Life
Taxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
By Neale Godfrey, Financial Literacy Expert Published
-
Revocable Living Trusts: The Good, the Bad and the Ugly
People are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
By Charles A. Borek, JD, MBA, CPA Published
-
How to Plan for Retirement When Your Child Has Special Needs
When your child has special needs, your retirement plan should include a plan for when you'll no longer be able to care for them yourself. A five-step guide.
By Christopher M. Butterworth, ChSNC®, CRPS, CLU® Published
-
Tax Advantages of Oil and Gas Investments: What You Need to Know
Tax incentives allow for deductions and potential tax-free earnings — benefits accessible only to accredited investors in small producer projects.
By Daniel Goodwin Published
-
Charitable Contributions: Five Frequently Asked Questions
Make the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
By Stephen B. Dunbar III, JD, CLU Published
-
Financial Leverage, Part Two: Don't Say We Didn't Warn You
A lesson in how highly leveraged investments can benefit the first movers and crush the next round of buyers.
By Stephen P. Harbeck Published
-
Taxes in Retirement: What ESOP Participants Need to Know
Most Employee Stock Ownership Plans (ESOP) participants transfer company stock to an IRA starting around age 55, so taxes on that money have been deferred.
By Peter Newman, CFA Published