Can I Borrow from My Annuity for a House Down Payment?
You can borrow against your annuity to make a down payment on a house, but you must be prepared to pay interest on the borrowed funds, fees and any penalties. In fact, when looking for a way to fund your down payment, borrowing against an annuity should be a method of last resort.
Key points to remember
- When borrowing from an annuity, be prepared to pay an assortment of fees and penalties.
- The insurance company levies a penalty, called a “surrender fee,” on early withdrawals from an annuity.
- You may be able to borrow against the annuity without paying a penalty if you hold the contract long enough.
How Annuities Work
An annuity is a unique investment vehicle that is managed by a life insurance company rather than a traditional brokerage. One way to buy an annuity: You deposit money into an annuity during your working years, and the growth is tax-sheltered until you start receiving distributions or withdrawals at retirement. At this point, principal and interest are paid back to you in a series of regular installments.
Penalties and surrender fees
The advantage of an annuity is the peace of mind it can provide: regular and guaranteed income throughout your retirement years. However, the product has many drawbacks. Most important is your inability to withdraw money before age 59½ without incurring high fees and penalties, like any other retirement account, such as a 401(k) or retirement account. individual (IRA).
Annuities are investment vehicles managed by life insurance companies that can provide retirees with income in retirement.
tax rules
The Internal Revenue Service (IRS) is the first to penalize you for withdrawing an annuity before reaching the age of 59½. Generally, you are subject to a 10% tax on any money you withdraw early. You must also pay ordinary income taxes, which have been deferred up to this point, on the money withdrawn.
However, the IRS grants exemptions from the penalty, including if you are buying or building your first home and borrowing from an annuity for the down payment. Additionally, with the passing of the Every Community Establishment for the Enhancement of Retirement (SECURE) Act of 2019, you are permitted to withdraw $5,000 to be used for the cost of childbirth or adoption as long as it is within one year of the birth of the child or finalization of the adoption.Although the exemptions are penalty-free, you will still be liable for ordinary income tax on any of the withdrawal amounts.
Redemption fees
The insurance company also levies its own penalty, called a surrender charge, on early withdrawals, and this can be as high as 20%.Unlike the IRS, insurance companies do not waive surrender fees for any individual financial situation, such as buying a first home.
Annuities are structured in many different ways, and some are sold with no surrender charge. You may also be able to borrow against the annuity without paying a penalty if you hold the contract long enough. The contract specifies the surrender period, ie the number of years during which you will be liable for the surrender charge. The interest rate on these fees generally decreases over time.
