How can I get out of my annuity?

If you're thinking of dumping your annuity - whether it's fixed, equity-indexed or variable - make sure that you know what the consequences of your decision will be, because for many of them, there is no easy way out.

There is a variety of reasons why you might want to get rid of your annuity. Perhaps your financial situation has changed and you can no longer contribute to your annuity or maybe you have several annuities you want to combine into one.

This is what you are probably going to lose when cashing out early:

• You'll be paying tax as you would on regular income because an annuity is treated like ordinary income

• Surrender charges until the charges no longer apply to withdrawals on "fully loaded' products. Smaller surrender charges are usually carried by no-load or low-load annuities.

• If you are under the age of 59 ½, then a penalty of 10 percent on the taxable portion of your annuity will be forfeited to the IRS. That's the price you pay for not taking advantage of the IRS tax treatment of your annuity.

There would be tax ramifications for cashing out because annuities enjoy special tax treatment in the eyes of the IRS.  However, this isn't always the case. A "1035 transfer' can facilitate tax-free transfers.

Even though section 1035 of the tax code allows for the tax-free exchange between like accounts, a 1035 transfer can not go from an annuity to a life insurance policy.

Some alternatives:

• 1035 exchange: Use this to convert to another annuity. 

• Slide into an immediate annuity: If you want an early retirement, you might want to roll into an immediate annuity. This way, you aren't getting out of your annuity; you're simply changing the type of annuity.

• Change your fund allocation: You might want to change your fund allocation, in order to take advantage of the current market.

• Look into waivers: Some annuity contracts will allow you access to some or all of your money in the event of nursing home confinement, disability or terminal illness.