You may be thinking of getting out of your annuity. If so, you should carefully consider the consequences. Annuities are known for being difficult to leave.

There are many reasons that investors may want to leave an annuity. Perhaps you want to combine several annuities into one. Your financial situation may have changed, meaning you can no longer contribute to your annuity.

When you cash out of an annuity early, and before you are 59 1/2, you face a 10% penalty on the taxable portion of your annuity. This will be paid to the IRS. You will also pay taxes as you would on regular income.

You will also pay a surrender charge to the insurance company for your surrender. This is usually 7% if you surrender in the first year, 6% in the second year and so on. Low-load and no-load annuities feature smaller surrender charges.

You are allowed an IRS 1035 transfer that makes a transfer between accounts tax-free. However, this is for transfers between like accounts - annuity to annuity, life insurance to life insurance and life insurance to annuity. You cannot transfer an annuity into a life insurance policy without paying taxes.

If you use your annuity to fund your IRA, you can transfer to another IRA without a tax penalty. You will have a 60 day window in which to transfer. This is a rare situation, as it isn't recommended to fund your IRA with an annuity due to unnecessary fees.

Alternative to surrendering your annuity

If you don't want to exchange your annuity under the 1035 exchange, you do have some other options available.

If you need immediate cash, your policy may allow you access to some or all of your money in the event of terminal illness, nursing home confinement or disability. A few policies allow you to withdraw up to 15% of your annuity under certain circumstances.

You could change your sub-accounts within your variable annuity to fully take advantage of the current market. You will pay fees for the changing of sub-accounts.