The short version

People often worry that buying an annuity means locking their money away with no way to reach it. That's not quite how it works. You can take money out of an annuity — the real questions are how much you can access at once, when, and what it costs to take more than the contract allows. The answers live in three separate places: your insurance contract (surrender charges and the free-withdrawal amount), the IRS (a possible 10% federal tax before age 59½), and, if the money is in a retirement account, the required minimum distribution rules.

This guide walks through each of those in plain English so you can understand what your own contract is likely to allow before you sign anything — or before you take money out of an annuity you already own. Everything here is general education about how these products work in North Carolina. It is not investment, financial, or tax advice, and the exact rules for your situation are always the ones printed in your own contract and disclosure. This article covers fixed and fixed-indexed annuities, which is the only lane The Jordan Insurance Agency works in.

The free-withdrawal provision: your penalty-free access each year

Most fixed and fixed-indexed annuity contracts include a free-withdrawal provision (sometimes called a free-surrender or penalty-free withdrawal). This lets you take out a limited amount of your money each year without triggering a surrender charge from the insurance company.

The amount is set in your contract, and it is commonly up to about 10% of the account value per year. That figure is a common industry allowance, not a universal guarantee — some contracts allow less, some structure it differently, and the exact percentage and how it's calculated are always spelled out in your policy. So the honest answer is: yes, there is almost always a way to reach some of your money each year without a company penalty, but you have to read your own contract to know the exact figure.

A few practical points about the free-withdrawal amount:

  • It is usually calculated as a percentage of the account value, and it often resets each contract year.
  • Unused free-withdrawal room typically does not carry over to the next year — check your contract.
  • Taking a free withdrawal from a fixed-indexed annuity before an index term ends can mean you don't receive all of the index-linked interest for that term, because the interest is generally credited at the end of the term.
  • Even a penalty-free withdrawal can still trigger income tax, and possibly the IRS 10% early-withdrawal tax if you're under 59½. "Penalty-free" refers to the insurance company's surrender charge, not the tax code.

That last point trips a lot of people up, so it's worth repeating: the contract's free-withdrawal provision and the IRS penalty are two completely different things. Avoiding one does not automatically avoid the other.

Surrender charges: the cost of taking too much, too soon

If you withdraw more than your free-withdrawal amount while you're still inside the surrender period, the insurance company applies a surrender charge to the excess.

The surrender period is the span of years after purchase during which taking out more than the allowed amount costs you a fee. In North Carolina, surrender charges typically apply during the first 5 to 15 years from the policy issue date. The charge is designed to decline over the life of the contract and reaches zero at maturity — so the longer you hold the annuity, the smaller the charge on an excess withdrawal becomes, until eventually there's no surrender charge at all.

The exact starting percentage and the schedule of how it steps down are set in your contract, so we won't quote a specific number here — it varies by carrier and product. What matters is the structure: a limited penalty-free amount each year, a surrender charge on anything above that during the surrender period, and no surrender charge once the period ends. If you want the mechanics in more depth, see our companion guide on the annuity surrender period and surrender charges.

Why surrender charges exist at all

Surrender charges aren't there to trap you — they're the trade-off that makes the guarantees possible. Because the insurance company is committing to hold and invest your premium over a multi-year term (which is what lets it offer a guaranteed rate or principal protection), it needs some assurance the money will stay put for a reasonable stretch. The surrender charge is how that commitment is enforced. It's a real cost of the product, and it's exactly the kind of trade-off worth understanding before you buy: reduced short-term liquidity in exchange for the contract's guarantees.

Common ways to avoid or reduce a surrender charge

  • Stay within your annual free-withdrawal amount. Withdrawals up to the contract's penalty-free limit don't incur a surrender charge.
  • Wait out the surrender period. Once it ends, the surrender charge is zero and you can access the full value without a company penalty.
  • Look for a nursing-home or care waiver. Many North Carolina contracts waive surrender charges for qualifying nursing-home confinement or similar events — check whether yours includes one.
  • Use the free-look period if you just bought it. More on this below.

The free-look period: changing your mind right after you buy

North Carolina gives annuity buyers a free-look period — a short window right after you receive the contract during which you can return it for a full refund of your premium, with no surrender charge. In North Carolina that window is 10 days, and it's 30 days if the annuity is replacing existing life insurance or annuity coverage.

The free look is a genuine consumer protection: if you get the contract home, read it, and decide it isn't right for you, you can unwind the purchase during that window and get your money back. It's one more reason it pays to actually read the contract when it arrives rather than filing it away.

The IRS side: the 10% early-withdrawal tax before age 59½

Here's the part that has nothing to do with your insurance company. The federal government has its own rule about pulling money out of an annuity early.

When you withdraw the taxable portion of an annuity (generally the earnings/interest) before age 59½, the IRS generally applies an additional 10% federal tax on that taxable amount, unless an exception applies. This is on top of the ordinary income tax you already owe on the earnings, and it is entirely separate from any surrender charge the insurance company might apply.

Put simply, an early withdrawal before 59½ can face up to three layers of cost:

  • The insurance company's surrender charge — if you exceed your free-withdrawal amount during the surrender period.
  • Ordinary income tax — on the earnings portion you withdraw, because annuity growth is tax-deferred, not tax-free.
  • The IRS 10% additional tax — on the taxable amount, because you're under 59½.

Common exceptions to the IRS 10% tax include death, total and permanent disability, terminal illness, and a series of substantially equal periodic payments, among others. Whether an exception applies to you is a tax question for a qualified tax professional. We explain this rule in more detail in our guide on the annuity early-withdrawal penalty, and how the earnings are taxed in our guide on how annuities are taxed.

How the earnings-first tax order matters

For a non-qualified annuity (one bought with after-tax dollars outside a retirement plan), withdrawals are generally treated as coming out of earnings first. That means the money you pull out early is more likely to be the taxable, penalty-exposed portion rather than your original principal. For a qualified annuity — one inside an IRA or funded by a 401(k) rollover — the whole distribution is generally taxable because it was funded with pre-tax dollars. Either way, the practical takeaway is the same: taking money out early is usually a taxable event, and before 59½ it can carry the extra 10% federal tax.

If your annuity is in a retirement account: RMDs

If your annuity is held inside a tax-deferred retirement account — for example, an annuity inside an IRA, or one funded by a 401(k) rollover — the required minimum distribution (RMD) rules apply, and they can actually require you to take money out.

Under current federal rules, RMDs generally begin at age 73 for people born between 1951 and 1959, and at age 75 for those born on or after January 1, 1960. Your first RMD is due by April 1 of the year after you reach your applicable age, and each RMD after that is due by December 31. If you own a qualified annuity, at some point the question flips from "can I take money out?" to "I'm now required to." Our guide on annuities and required minimum distributions goes deeper on how this works.

One important note if you're rolling money over: an RMD is not eligible to be rolled over. If you're due an RMD for the year, you generally have to take it before rolling the rest of the balance into another account or annuity.

Withdrawing vs. taking income: two different things

It's worth drawing a clear line between making a withdrawal and turning on income, because they're not the same and they have very different consequences.

  • A withdrawal is you reaching into the account value and pulling out a chunk of money. It's subject to the free-withdrawal limit, surrender charges, and the tax rules above. You keep ownership of whatever's left.
  • Annuitizing converts your balance into a stream of guaranteed income payments for life or for a set period. Once you annuitize, you generally can't take other money out — you've exchanged the lump sum for the income stream, and you usually can't change the payment amount.
  • A guaranteed lifetime withdrawal benefit (GLWB) rider is a middle path offered on many fixed-indexed annuities at extra cost. It lets you take guaranteed withdrawals for life without annuitizing, so you keep ownership of the account value. Because it's an optional rider, it typically has an ongoing cost — a trade-off to weigh. See our guide on annuity income riders (GLWBs).

And one hard stop worth knowing: if you take all of your money out — a full surrender — you've given up the contract and no longer have any right to future income payments from it. Surrendering is final.

A clearly-labeled hypothetical to tie it together

The following is a made-up illustration to show how the rules interact — not a quote, not a real contract, and not advice. Imagine a Charlotte resident, age 62, who owns a fixed annuity that's in year three of a ten-year surrender period, with a contract that allows a 10% penalty-free withdrawal each year. Suppose she wants to take out roughly 10% of the account value to cover a home repair.

Because she's staying within the contract's free-withdrawal amount, she owes no surrender charge. Because she's over 59½, the IRS 10% early-withdrawal tax doesn't apply. She will still owe ordinary income tax on the earnings portion of what she withdraws, since annuity growth is tax-deferred rather than tax-free. Now change one fact: if she were 55 instead of 62, that same withdrawal could also carry the IRS 10% additional tax on the earnings. And if she wanted to pull out far more than 10% during the surrender period, the amount above her free-withdrawal limit would face the company's surrender charge on top of the tax. Same contract, very different outcomes depending on age and amount — which is exactly why reading the specifics matters.

A quick reality check on "safe" and "guaranteed"

Because withdrawals and guarantees go hand in hand, one clarification belongs here. The guarantees in a fixed or fixed-indexed annuity — the guaranteed rate, the principal protection, the free-withdrawal provision — all rest on the issuing insurance company's financial strength and claims-paying ability. They are backed, up to North Carolina's limits, by the North Carolina Life & Health Insurance Guaranty Association, which covers up to $300,000 of the present value of annuity benefits per individual per insolvent insurer. Annuities are not FDIC-insured — that coverage is for bank deposits, not insurance contracts. We cover this in full in our guide on whether annuities are FDIC-insured and what actually protects your money. (By law, that guaranty-association coverage isn't something an agent may use as a selling point — it's a backstop, not a feature.)

One more scope note: this all applies to fixed and fixed-indexed annuities, which is the only lane The Jordan Insurance Agency works in. Variable annuities are securities that require a securities license, and their withdrawal and fee mechanics differ — they're outside what we do, and we mention them only to be clear about that boundary.

How to figure out what your specific annuity allows

Because every contract is different, the only way to know your exact numbers is to look at your own paperwork. Here's a short checklist to work through:

  • Find your free-withdrawal percentage — the amount you can take each year with no surrender charge, and how it's calculated.
  • Check where you are in the surrender period — how many years remain, and the surrender charge that currently applies to excess withdrawals.
  • Look for waivers — nursing-home, terminal-illness, or other conditions that waive surrender charges.
  • Note your age relative to 59½ — this determines whether the IRS 10% early-withdrawal tax is in play.
  • Confirm whether it's qualified or non-qualified — this changes how much of a withdrawal is taxable and whether RMDs apply.
  • Ask your tax professional about the income-tax and penalty consequences before you withdraw — that's a tax question, not an insurance one.

If reading a contract's fine print isn't how you want to spend your afternoon, that's exactly the kind of thing an experienced independent agent can walk through with you.

How The Jordan Insurance Agency helps

The Jordan Insurance Agency is an independent, licensed insurance agency based in Charlotte, North Carolina, serving clients across the state. We work in the fixed and fixed-indexed annuity lane, and a big part of what we do is help people understand — in plain English — exactly what their contract allows before they buy, and what their options are if they already own an annuity and need to reach some of the money.

Because we're independent, we can compare how different carriers structure their free-withdrawal provisions, surrender periods, and optional income riders, and show you where those trade-offs actually land for your situation. We'll help you read your own contract's withdrawal rules, point out where the IRS penalty and RMD rules come into play, and flag the questions worth taking to a tax professional. We do not provide investment, financial-planning, or tax advice, and we're not a financial planner — we're a licensed insurance agency that explains how these products work so you can make an informed decision. When you're ready, reach out to The Jordan Insurance Agency and we'll walk you through it, one piece at a time.